How to Calculate the Costs of Refinancing Your Home

Refinancing your home, or taking out a new loan and paying off the old one, can be financially beneficial - but only if the costs to do it are within reason.

Instructions

Difficulty: Moderately Easy

Things You’ll Need:

• Financial Calculator
• Online Mortgage/finance Services

1. Know your federal tax bracket.
2. Determine how much you anticipate saving on a monthly basis if you get a lower interest rate; do this by determining the difference between your current mortgage payment and what your payment would be at a lower interest rate.
3. Add in the refinancing costs, which include fees for a new title search, points you'll have to pay, the cost of an appraisal and other closing costs. (A point is 1 percent of the amount of a mortgage; borrowers often have to pay points as part of the fee for borrowing or refinancing.) Your prospective lender can provide you with this information, or you can use your original mortgage data as a basis.
4. Multiply your federal tax rate by the amount you could save to determine your after-tax savings.
5. Divide this amount into the cost of refinancing to determine how long it will take you to recoup your costs.

Tips & Warnings

• If rates have dropped by more than 1 percent since you originally took out your loan, it could pay to refinance, depending on how long you will be living in the house. If you don't expect to be in your house more than a few years, scrutinize refinancing very closely. It may actually cost you more to refinance than to stick with a higher interest rate.
• Beware of solicitations offering to lend more than the value of your home. Some lenders may offer to loan you 125 percent or more of the value of your home. It may be nice getting your hands on the money, but if you are suddenly put in the position of having to move, you will have to repay that mortgage when you sell - 100 percent of the house's value plus 25 percent more.