Once you've reached your break-even point, your refi starts to save you money. Here's how to calculate it.
First, get an estimate of the closing costs. Your mortgage advisor can provide this information when you apply. Next, divide the total loan costs by the monthly savings. The answer is the number of months it will take to reach break-even.
For example, let's say your refinancing closing costs are $4,000, and the new loan will save you $200 a month. Divide $4000 by $200 to get 20 --the break-even point. That means that it will take 20 months to recoup the cost of refinancing.
If you plan to stay in your home for less than the amount of time it takes to reach break-even, then refinancing may not be the right choice. A good rule of thumb is that it should take no more than 24 months to reach break-even. However, if the refinance is for a "forever home" or a home you plan to stay in for several years, then taking longer to recoup the costs of a refi may still work out in your best interest. Contact us to determine if you should refi.