Is refinancing my mortgage worth it?
Divide what the refinance will cost by how much it saves you each month; the result is your break-even point in months. If you expect to keep the new loan well past that point it is likely worth doing, and if you might sell or refinance again before it, it probably is not. That calculation matters more than any rule of thumb about how far rates have to fall.
The break-even calculation
Take the closing costs of the new loan and divide them by the drop in your monthly principal and interest payment. The answer is the number of months before the refinance has paid for itself. Keep the loan longer and you come out ahead; move or refinance again sooner and the costs outweigh the savings.
Watch the term, not just the payment
Refinancing into a new 30-year loan restarts the clock. The payment drops partly because it is spread over more years, and you can end up paying more interest in total even at a lower rate. Comparing against a term close to what you have left on the old loan, or a shorter one such as 15 years, shows the real saving.
Refinancing without paying closing costs
A lender credit can cover some or all of the closing costs in exchange for a slightly higher rate. With little or nothing paid up front you break even almost immediately, which suits a borrower who might move or refinance again before long. It is the same trade as buying down a rate, run in reverse.
When the rate is not the only reason
Some refinances are worth doing for what they change rather than what they save:
- Dropping mortgage insurance once you have enough equity
- Moving from an adjustable rate to a fixed one before it resets
- Taking cash out to replace higher-interest debt
- Removing a co-borrower after a divorce or separation
If you already have an FHA or VA loan
FHA streamline and VA interest rate reduction refinances exist for exactly this. They take less paperwork than a standard refinance and often need no new appraisal, which lowers the cost side of the break-even.
Sources
We would rather you checked than took our word for it.
Related
How do I get a lower mortgage rate?
Mostly you buy it down.
How do I get rid of PMI?
On a conventional loan you can request that private mortgage insurance be canceled once your balance reaches 80% of the original property value, and it must terminate automatically at 78% provided your payments are current.
When should I lock my mortgage rate?
Lock once you have an accepted offer and a realistic closing date, for a period that comfortably covers it; locks are typically available for 30, 45 or 60 days.