How to Calculate When to Refinance a Home

Refinancing your home when interest rates are lower than your current rate does not always pay off. The main cost of refinancing is upfront closing costs. Calculate the break-even point to determine when you will recoup the upfront costs in the form of savings on your monthly payment. In addition, your new mortgage may have a payoff date later than your current mortgage, which will cost you in the form of making monthly payments for that much longer. Calculate the total savings to make sure a refinance will save you money over the full course of the mortgage.

Instructions

Calculate Break-Even Point

1. Get a refinance interest rate quote and anticipated new monthly payment amount from your potential lender.

2. Ask your lender for a good faith estimate of the closing costs you would encounter if you were to refinance your home. These include appraisal fees, title fees and insurance, broker fees, and the cost of purchasing "points" to get a lower interest rate.

3. Subtract the amount of your new monthly payment from your old monthly payment to find the monthly savings.

4. Divide the amount of the closing costs by the monthly savings to find out how many months it would take you to break even on the upfront cost of refinancing. Do not refinance if you expect to move sooner than your break-even point. A break-even point within three years is typically considered reasonable, according to MSN Real Estate.

Calculate Total Savings

1. Multiply the amount of your current monthly payment by the number of monthly payments remaining in your existing mortgage to find the amount of your total remaining payments. For example, say you have 27 years left on your mortgage at $1,250 per month. This makes $405,000 that you will pay over the remainder of the mortgage.

2. Multiply the amount of your anticipated new monthly payment by the number of monthly payments in your new mortgage. That will give you the total payments on the new mortgage. A new mortgage of $1,100 per month for 30 years would cost $396,000 over the life of the mortgage, for example.

3. Add the amount of the estimated closing costs for the new mortgage to the total payments on the new mortgage to calculate the total cost of that mortgage over time. For example, add an estimated $2,500 refinance cost to the $396,000 of payments to get a total amount of $398,500.

4. Subtract the total payment amount on the new mortgage from the total payment amount on your existing mortgage to calculate your total savings. In this case, refinancing would save you $6,500 over the 30 years of repayment. This is an average of just $216.67 per year, which is far less than what you would expect with an apparent savings of $150 per month on the payments. The discrepancy is because the new mortgage has a longer repayment term.

References

• MSN Real Estate: What to Know Before You Refinance