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How to Know When Refinancing Makes Sense

By Bob Feeman
Refinancing costs money. Closings costs, which include fees for a title search, home appraisal and loan origination, can lead to hefty out-of-pocket expenses. But refinancing also can save you money over time by reducing interest payments. Here’s how to figure out whether it makes sense for you.

A few basic facts are vital to determining whether it’s a good idea to refinance: how long you plan to stay in your home, your current loan amount and interest rate, your likely new interest rate and expected closing costs. A loan officer can help you identify a likely rate and closing costs. You can check current rates in your area on and use the mortgage loan calculator to help get a handle on how a new loan would affect your monthly payment and overall interest.

Your goal is to find the “break-even” point, the length of time you’d need to keep your new mortgage for its lower monthly payments to offset the costs of refinancing. The Refinance Breakeven calculator on can help you do that.

For instance, say your original loan was a $200,000 30-year fixed-rate mortgage at an interest rate of 8.5%, and you have 25 years remaining on the loan. And say you qualify for an interest rate of 6.25% on a new 30-year fixed-rate mortgage.

Plug in the numbers, and the calculator will show that you have $190,980 left on your current loan. Figuring closing costs of $4,000 for a new 30-year mortgage, the calculator will show that it will take 12 months for your monthly-payment reduction to offset closing costs. If you plan on moving before then, refinancing may not be right for you.

The calculator also provides other break-even points that factor in the tax implications of reducing your interest rate (remember that interest on a mortgage is tax-deductible), and account for the higher proportion of early payments that go toward interest payments (which can slow the rate at which you build equity). By matching the term of your new loan with the remaining years on your existing loan, you can lower you monthly payments while building equity at the same pace.

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