When Should You Refinance Your Mortgage?

With mortgage rates at historic lows, many people are wondering if they should refinance their mortgage at this time. After all, mortgage refinancing is one of the best ways to potentially save you thousands of dollars.

But with so many different numbers thrown around, it can be very confusing! The Money Ninja is here today to simplify mortgage refinancing so you can easily find out whether or not refinancing is worth it!

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Mortgage Refinancing Overview

Owning a house has long been considered the ultimate American dream. There’s nothing like coming back to a place you can truly call home.

But owning a home is also expensive. Unless you bought your house in cash (kudos if you did), you probably have a mortgage that you’re paying thousands of dollars in interest every year.

One of the best ways to save money is by refinancing your mortgage to a lower interest rate.

However, the decision to refinance isn’t always as simple as finding a lower rate. There are costs and fees associated with refinancing.

In order to find out whether you should refinance your mortgage or not, you need to find out your break-even point.

How To Find Your Break-Even Point

Balance scale depicting when should you refinance mortgage

Your break-even point is the amount of time it takes for your interest savings to outweigh the cost associated with refinancing a mortgage.

Simply put, your break-even point will help you decide if refinancing your mortgage is worth it or not.

If you don’t know how long it takes to recoup your refinance costs, stop going through the refinancing process right now and figure this out. Because without knowing this, you may even end up losing money.

Here’s how to calculate your break-even point:

Step 1: Find Out How Much Refinancing Your Mortgage Will Save You

The first step in figuring out your break-even point is finding out how much refinancing your mortgage will save you.

Use the mortgage calculator provided by our friends over at MortgageCalcutor below to enter in your current mortgage information and the refinanced rate:

For example, let’s say you have a mortgage balance of $350,000 with a 4.5% interest rate on a 30-year loan. You’ve been paying this mortgage for 5 years and you have 25 years left on the mortgage.

After shopping around for the best mortgage rates at sites at Credible, you find a refinance offer of 3.0% for a 30-year mortgage loan.

Using the mortgage calculator, here’s the comparison between the old loan and new loan:

In this scenario, you’ll save $469 per month on your mortgage payment and $52,403 in total interest over the life of the mortgage loan.

That’s big moolah!

If you work with a lender that doesn’t charge any closing costs or fees for your refinance – congratulations! You’ll immediately save money and there isn’t a break-even point to worry about.

Having said that, lenders need to make money so you’ll rarely run into a situation where there aren’t any closing costs involved.

Step 2: Add Up Closing Costs

Closing costs include a multitude of fees that lenders charge for their services and expenses. It used to be super confusing, but thanks to government regulations, it’s much clearer now.

The fees are broken down by sections. Here’s one from the example I’ve been using:

Refinancing closing cost details example
  • Section A – Origination Charges: Fees that the lender charges, such as origination or application fees. If you bought points to lower your rate, those fees would show up here too.
  • Section B – Services You Cannot Shop For: Fees the lender charges to reimburse for services they’ll pay for – like hiring someone to appraise the value of your house or run your credit report. The lender will choose who to use for this.
  • Section C – Services You Can Shop For: Fees for other services that you can pick who to use for items like title fees (title insurance, notary costs, etc.).
  • Section D – Taxes and Other Government Fees: Fees that the government charges to record the refinance details in their books
  • Section E – Prepaids: There’s a lag from the time you refinance to when you actually pay the first month of the new loan. Prepaids are used to pay for this time in-between for things like mortgage interest and property taxes.

Now, when you’re adding up your total closing costs, ignore everything under prepaids. Don’t include it as part of your calculations.

Prepaid interest and property taxes are things you would have to pay for anyway, regardless if you refinanced or not.

To get the actual closing costs, add up sections A, B, C, and E only (highlighted in yellow below):

Refinancing closing cost details with section A + B + C + E highlighted in yellow

Adding those sections together in this example, the total closing costs comes out to $1,654.

Step 3: Figure Out Your Break-Even Point

Now it’s time to calculate how many months it will take to break even.

Do this by dividing the total loan costs by the monthly savings.

Recall in Step 1 that you’re saving $469 per month in mortgage payments.

In Step 2, we figured out your closing costs total to $1,654.

Divide $1,654 by $469. The answer is 3.5.

That means that it will take 3.5 months to recoup the cost of refinancing. That’s your break-even point.

If you plan on staying at your current home for more than 3.5 months, you’ll come out ahead. For most people in this scenario, that’s a no-brainer.

The only situation where this wouldn’t make sense is if you’re planning to sell your house soon. And if you are, why are you reading this is the first place? 🙂

Compare Refinancing Rates

Are you ready to start the refinance process and wondering where to start?

Literally every bank has refinancing rates you can look up, but it just takes too much time to visit every lender’s website and look up what their refinance rates and closing costs are.

What you want to do is look for refinancing comparison sites that show you the rates offered across many lenders. This saves you time and money.

For this, I like to use Credible (NMLS #1681276).

Credible allows you to compare lenders in just 3 minutes. You’ll get actual rates from multiple lenders without impacting your credit score.

They won’t spam you with emails and phone calls either, unlike other online sites.

Credible home page

The Bottom Line

Refinancing your mortgage is one of the best ways to save money. We’re talking about potentially thousands of dollars.

It used to be a very confusing and intimidating process, but companies like Credible has made it an easy and enjoyable experience.

Figure out your break-even point and compare lenders today.

How much have you saved by refinancing? Are there any other thing you’ve learn from the process?

Share with the ninja community in the comments section below!

About John Pham

John Pham is a personal finance expert, serial entrepreneur, and founder of The Money Ninja. He has also been fortunate enough to have appeared in the New York Times, Boston Globe, and U.S. News & World Report. John has a B.S. in Entrepreneurship and a Masters in Business Administration, both from the University of New Hampshire.

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