How to Figure Out If It is Wise to Refinance

With mortgage rates at near historic lows, you might be asking yourself if now is the right time to refinance. This is a very good question. Several factors will determine what might make this worthwhile. They are:

  • How much will my payment and/or rate decrease?
  • How much will the refinance cost, and who will be paying for it?
  • How long do I plan on staying in the property?

Larger loan amounts will yield greater savings per month over smaller loan amounts with a given rate change, but even then care should be taken to make sure the transaction is in the borrower’s best interest.  For example, a homeowner with a $200,000, 30-year fixed rate mortgage at 6% interest is currently paying $1,199.10 per month in principal and interest. Should that borrower find a lender offering a refinance rate of 5.5%, that payment would drop to $1,135.58, creating a difference of $63.52 per month.

With the typical refinance transaction costing about $1,800, the recapture period of the expense of doing this works out to $1,800/$63.52, or about 28 months.  If the homeowner were to sell the property or refinance it within that time period, the expense incurred would amount to more than the benefit.

The positive side to this example is that if the homeowner were to stay in the property for 10 years after the refinance, the payment difference, $63.52 for 120 months, would equal $7,622.40 which, less the $1,800, gives the borrower a net benefit of $5,822.