One of the questions I’m often asked is, “Should I refinance my home?” The answer to this is “depends.” It depends on your particular situation.

“Should I refinance my home?” is really answered by another question, “How long do I plan on being in this house?” This question should be answered before considering refinancing. The reason you should ask this question is due to the costs to refinance your home, affectionately termed “closing costs.” Closing costs are costs associated with processing and obtaining a new loan. Because you will have to expend dollars to refinance to a lower rate, you must determine how many months it will take to recoup the closing costs. To perform this calculation, you need the following information:

1. Your current monthly payment on your mortgage (i.e., principal and interest only)
2. New mortgage loan amount (i.e., the balance of your mortgage loan)
3. A ballpark interest rate for the new mortgage loan
4. The loan term for the new mortgage loan (e.g., 30 years, 15 years)

To determine your new monthly loan payment, enter the values from items 2, 3 and 4 above into the calculator below.
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Let’s assume that your current monthly mortgage payment is $1,240.00 per month and that you wish to refinance the current balance on your mortgage of $200,000 for a period of 30 years at 5.25% interest. The new monthly mortgage payment would be $1,104.41. The difference between your current mortgage payment and the new mortgage payment is $135.59 ($1,240 – $1,104.41). This means that you would save $135.00 per month if you were to refinance your mortgage. However, don’t forget the closing costs that you must pay.

Let‘s assume your mortgage broker and title company will charge you $3,200 to refinance your loan. Before you can truly begin saving $135.59 per month, you have to “pay off” the closing costs. This is called the refinance “break-even” point, or the point at which your cumulative monthly savings equal the cost to refinance. The break-even point for this example is 23.6 months ($3,200 / $135.59). After month 24, you will truly be saving $135.59 per month.

So the answer to the question, “Should I refinance?” comes down to this, “Will you be in this house for more than 24 months?”