Time to Refinance?

Episode 502

If you bought a house in the last couple of years, you’ve probably been wondering, “When can I refinance?”

The Federal Reserve has already made one interest rate cut, and more are expected before the end of the year. So when will it make sense to refinance your mortgage?

If you’re considering refinancing your mortgage, it’s crucial to weigh various factors before making a decision. Movement Mortgage provides a helpful article, "Refinancing? Calculate Your Break-Even Point First!", which explains when refinancing makes sense and how to determine if it's right for you. While lower interest rates are a common reason to refinance, it’s not the only factor to consider.

What Is the Break-Even Point?

One effective way to decide if refinancing is a good move is by calculating your "break-even point." This is when the savings from your lower monthly mortgage payments equal the costs of refinancing, which can range from 2% to 5% of the loan amount. Knowing this number can clarify how long it will take before you start to see financial benefits from the refinance.

For example, if you’re refinancing a $200,000 mortgage, the closing costs might range from $4,000 to $10,000. If your new mortgage payment saves you $200 per month, it would take 20 to 50 months to break even. If it takes over 60 months to reach your break-even point, it might be wise to hold off on refinancing until rates improve further.

Factors Impacting Your Break-Even Point

Several costs can impact your break-even point, including:

Application and Origination Fees: Costs for processing your loan.
Appraisal Fees: The cost of assessing your home's current value.
Title and Insurance Fees: Includes title search, title insurance, and other required reports.
Prepaid Interest: Covers interest from the closing date to the end of the first month.

Property taxes and homeowners insurance may also need to be paid upfront at closing, contributing to the total closing costs. The more you save in interest each month, the quicker you’ll reach your break-even point.

Shorter Loan Terms Lead to Faster Savings

Choosing a shorter loan term, like refinancing from a 30-year to a 15-year mortgage, can help you reach your break-even point faster. Shorter terms typically come with lower interest rates, which means you’ll pay off the refinance costs sooner and less in interest over the life of the loan. However, it’s important not to extend the term of your mortgage when refinancing, as doing so could result in paying more interest over time.

How Long Will You Stay in the Home?

Another critical consideration is your future plans. You may not benefit from refinancing if you plan to sell the home in a few years. Use the break-even point calculation to determine if it aligns with your timeline. If you break even after 24 months but intend to sell the home in 18 months, there may be better choices than refinancing.

Refinancing can be smart when interest rates drop, but it’s essential to calculate your break-even point and consider your long-term plans. Whether you’re reducing monthly payments or aligning with your future goals, these steps can help you make a wise decision for your financial well-being.

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