Mortgage rates are incredibly low right now. You look at your mortgage rate and notice it is higher than the current offerings. But is it smart to refinance right now? How do you know if you should refinance your existing mortgage?
There are many factors to consider when it comes to whether or not you should refinance your mortgage, but I’m going to focus on one of the most common refinancing rules of thumb.
Pay attention to your break-even point.
Your break-even point is the moment (expressed in months) when the financial benefits of reducing your mortgage rate are greater than the costs associated with refinancing your mortgage.
Fortunately, calculating your break-even point is not difficult. To do this, take the closing costs of the new loan and divide that amount by the monthly savings.
Allow me to illustrate.
Let’s assume that, after refinancing, the new mortgage payment will be $150 less than your old mortgage payment, and the new mortgage comes with $3,000 in closing costs. This means your break-even point is:
$3,000 / $150 = 20 months
Your break-even point is 20 months. Should you take it? It depends. If you’re planning to move in less than 20 months, the answer is no. You end up losing money. However, if you’re planning to stay beyond 20 months, it may be a smart money move.
Of course, figuring out your break-even point requires that you receive accurate information about the new loan from your lender. So, make sure you get a breakdown of the new mortgage payment and loan costs. This document may be referred to as a Good Faith Estimate (GFE), Loan Estimate, or Closing Disclosure.
So, when considering whether or not you should refinance your mortgage, calculate the break-even point. The result can help you make a wise financial decision.