Does Refinancing Your Mortgage Still Make Sense? Key Factors Every Homeowner Should Consider
- Nick Granter
- Jun 10
- 2 min read
Does it make sense to refinance your mortgage?
Refinancing your mortgage may be an excellent option to reduce your monthly housing payment and provide an “increase” to your monthly income with the savings. The extra funds from refinancing can then be used to reach other financial goals, such as paying down debt, increasing your emergency savings, and adding to your investment portfolio. However, before signing up to refinance your mortgage tomorrow, there are several things to consider during this process.
Interest Rates
I have noticed that many lenders are advertising their interest rates “as low as,” followed by another chart showing the discount points available for that particular mortgage type. For example, a loan may be advertised “as low as 5.5% with 0.5 discount points.” That means that the rate is actually 6%, and buying a discount point would reduce it to 5.5%.
A discount point is a percentage of your total loan amount. This means you are paying that amount upfront to reduce the interest rate on your loan. If you are securing a $400,000 mortgage, a 1% discount point is $4,000. It is important to discuss the interest rate terms carefully with a loan officer and to shop around at several lenders.
Closing Costs & Break-Even Point
At the heart of a home refinance are the closing costs and the break-even point. After all, the idea is to save money, and this is where the math will hopefully be in your favor. Your break-even point is calculated by dividing closing costs by the savings in your monthly mortgage payment.
Example:
Your refinance terms lower your monthly mortgage payment by $250.00.
Your closing costs to secure this refinance are $8,000.
Therefore, your breakeven is $8,000 / $250.00 = 32 months.
In 32 months, you will successfully have come “even” from your starting point before you took this loan. The lower your break-even point is, the more savings you are incurring from this refinance.
It is also worth noting that during a refinance, your closing costs will be similar to those for the initial purchase. Titling fees, appraisals, document fees, and the like are all attached to a refinance. Of particular note, if your loan has an escrow balance, it must be liquidated, and a new escrow will be created. These are all items that need to be discussed carefully with the loan officer who is servicing your loan.
When to refinance
Mortgage research will likely provide you with a generally agreed-upon statement: an interest rate 1% lower than your current rate is a good starting point for refinancing. It may be worth beginning these discussions with your current lender when you see rates start to trend in that direction.
If you want to talk more about your financial situation and whether refinancing is a good strategy for you, reach out to your financial advisor to start the conversation today.
