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Should I Refinance My Home?

image alt text Team
UpdatedApr 19, 2011
Key Takeaways:
  • Understand the total cost of a mortgage loan refinance.
  • A refinance can lower the total cost of your mortgage loan significantly.
  • A cash-out refinance loan can help you pay for remodeling or college.
At what interest rate would it make sense for me to refinance my home?

My wife and I are 61. The market value of our house is $300,000 We have a loan balance of $118,000 at 6.3% fixed for 30 years. Twenty five years remain on the mortgage. We have a FICO score of 812. At what rate would we have to refinance to make it worthwhile considering fees, etc? An suggestion on where to go for the best refinance deal? We plan on staying in the house for five years until we both retire. One of us is going to part-time soon and we want to refinance to save on monthly payments.

If you are asking yourself: Should I refinance my home mortgage loan then know that a refi mortgage can be used for several purposes — to lower your interest rate, to lock in a fixed interest rate, to pay off credit card debts, or to combine two mortgages into one. It is a substantial financial decision to make, so make sure you are well informed with information before taking any action on a refi mortgage. In your case it appears that you may want to look into a lower interest rate mortgage. If you are planning on only staying in the home for five years then you may want to consider an adjustable rate mortgage that is fixed for the first five years.

Calculating the Break-Even Point

The Federal Reserve Web site published a helpful Web page on mortgage refinances that includes this table that helps you calculate the break-even point for a mortgage refinance. The example assumes a $200,000, 30-year fixed-rate mortgage at 5% and a current loan at 6%. The fees for the new loan are $2,500, paid in cash at closing.

ExampleYour numbers
Current monthly mortgage payment$1,199
Subtract new monthly payment-$1,073
Monthly savings$126
Subtract your tax rate from 1 (e.g. 1 - 0.28 = 0.72)0.72
Multiply monthly savings by your after-tax rate126x0.72
After-tax savings$91
Total of new loan's fees and closing costs$2,500
Divide total costs by monthly after-tax savings$2,500/91
Number of months it will take to recover refinancing costs27 months

you may also want to compare the equity build-up in both loans. if you have had your current loan for a while, more of your payment goes to principal, helping you build equity. if your new loan has a term that is longer than the remaining term on your existing mortgage, less of the early payments will go to principal, slowing down the equity build-up in your home.

your questions

it is difficult for me to say at what exact rate would be best for you to make the decision to refinance your mortgage. ideally, you want to break even (the cost of the refinance divided by the amount saved monthly) within 24-36 months of closing the refinance. this way you have at least two years worth of true savings. it is also difficult for me to comment on the fee structure because each lender or broker will charge different amounts.

i encourage you to visit the savings center to get a free quote on a mortgage refinance from up to four pre-screened lenders. or use the calculator below to see the latest rates.

i hope this information helps you find, save, and learn.