Often, a few years after obtaining a mortgage, rates go down or your financial situation changes. The mortgage that you have may not make sense anymore. You want to stay in your current house but feel you need to refinance. Does that make financial sense? Understanding the break-even point can help you to know if refinancing makes sense for you.
The break-even point is how long until the savings from the new mortgage is more than it cost to get the new loan. It costs money to get a loan. There are closing costs involved that can add up. The break-even point occurs when you have made up the difference between the closing costs and can now save money with the new mortgage. It therefore can help you to determine if you should refinance.
For example, if you have a 30 year fixed rate mortgage for $150,000 with an interest rate of 8 percent, you may think you can get a better interest rate. After paying on the mortgage for six years, your remaining principal is now $140,737. Currently, your monthly payment is $1,100. If you refinance and get a 6 percent interest rate, your new monthly payment would be $844. After a little less than two years, you would break even. If you know you will be moving prior to that, then it would not make sense to refinance. If, however, you plan to be in the home for many more years, refinancing can make sense.
Before deciding to refinance, calculate what your break-even point can be. You can use the Refinance Calculator [link to calculators] in the LendingTree.com Consumer Education Center. Be sure to factor in your taxes and whether you will roll your closing costs into your loan or pay them up front. These factors also affect your break-even point.