What’s Your Break-Even Point?

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With interest rates at near-historic lows, now is a great time to consider refinancing your mortgage. From reducing your monthly payment amount to saving thousands in interest over the course of the loan or getting out from under an Adjustable Rate Mortgage, there are many reasons why you should refinance if you’re able to do so.

If you’re trying to determine whether or not it makes sense to refinance your mortgage, take the following into consideration before you rush off to the bank for an application:

Cost of Refinancing

Just as you paid closing costs when you first bought your home, you’ll again need to pay the same kinds of costs to refinance. While you might not pay as much as you did the first time, you could still end up owing thousands. You’ll want to decide how you’ll pay for these costs—either by using your savings or rolling the costs into the new loan.

The Break-Even Point

A break-even analysis is the easiest way to determine if the reward of refinancing is worth the cost. For refinancing purposes, a break-even analysis helps you figure out when you’ll recoup all of the costs through the savings you’ll realize in your new, lower monthly payments.

You can calculate this in three easy steps:

- Subtract your new monthly payment from the old (don’t include taxes or other costs as those haven’t changed)

- Divide the total closing cost by this number to get the number of months you’ll need to recoup everything you spent

- Divide this number by 12 to figure out how many years before you break even

- Once you have the number of years it will take to reach break-even, consider if you plan to still be living in the home at that time. If you will be moving before then, it probably doesn’t make sense to refinance. However, if you are in your “forever” home, be on your way to the bank!

Shop Around

Once you’ve decided to refinance, you next need to decide which lender you’ll use. You should start with your current lender as they’ll sometimes reduce fees in order to keep you as a customer. Other great options include credit unions and programs with preferred lenders through your employer (check with your HR department). As you do your research, pay attention to the terms, rates, fees, and fine print.

Mind the Details

After you’ve chosen your lender and submitted your application, pay attention to all of the details throughout the process. You’ll need to gather all of the necessary documents, attend a closing, and potentially transfer bank information. Stay up-to-date with the process to ensure you’re not costing yourself unnecessary time and money.

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