When Does Refinancing Make Sense? A Simple Break-Even Test
Daniel ParkNo. 83
Updated
Key takeaways
- Refinancing makes sense when the savings outweigh the costs before you plan to move.
- Divide your closing costs by your monthly savings to find your break-even point in months.
- Other reasons include dropping mortgage insurance, shortening your term or switching from an adjustable rate.
- If today’s rates are higher than the rate you locked, hold on to your current loan.
Refinancing replaces your current mortgage with a new one. It can save money, but it also has closing costs. Here’s how to decide.
The break-even test
Divide your total refinance costs by your monthly savings. If costs are $6,000 and you save $200 a month, you break even in 30 months. If you’ll stay longer than that, refinancing may pay off.
| Refinance costs | Monthly savings | Break-even |
|---|---|---|
| $4,000 | $150 | About 27 months |
| $6,000 | $200 | 30 months |
| $8,000 | $400 | 20 months |
Good reasons to refinance
- A meaningfully lower rate.
- Removing mortgage insurance once you have enough equity.
- Moving from an adjustable rate to a fixed rate.
- Shortening your term to pay off the home sooner.
- Taking cash out for a major renovation, carefully.
When to wait
When market rates are above the rate you already have, refinancing for a lower rate isn’t possible. If you locked a lower rate, hold on to it. If you bought recently at a higher rate, keep an eye on rates and run the break-even test when they fall.
Daniel’s tip: Ask your current lender or servicer first. Some offer reduced fees to keep your loan, and a streamlined refinance may be available for FHA and VA loans.
Compare your current payment with a new rate.
Frequently asked questions
Does refinancing restart my loan?
Usually, yes. A new 30-year loan starts a new term, so compare the total interest, not just the monthly payment.
Can I refinance with little equity?
Some programs allow it, especially streamlined FHA and VA refinances. Ask your lender what fits.
Filed under Money & Mortgages
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