When does refinancing actually make sense? Start with your break-even point

When rates drop, refinance ads pop up everywhere. Some of those refinances are smart. Some cost more than they save. The fastest way to tell the difference is your break-even point.

What is a break-even point?

Every refinance has costs: lender fees, title, appraisal and so on. Your break-even point is how long it takes for your monthly savings to cover those costs.

The idea is simple: divide your total refinance costs by your monthly savings. The answer is the number of months until you’re ahead. If you expect to keep the loan well past that point, the refinance usually makes sense. If you might sell or refinance again soon, it may not.

Try it with the refinance break-even calculator.

Reasons to refinance besides a lower rate

• Dropping mortgage insurance. If you have an FHA loan and enough equity, refinancing to conventional can remove your monthly mortgage insurance.
• Shortening your loan. A shorter loan can save a lot of interest over time, though the payment may go up.
• Taking cash out. Equity can fund a remodel, a pool or a down payment on a rental.
• Changing loan type. Moving from an adjustable rate to a fixed rate can add predictability.

Streamline options

If you have an FHA or VA loan, you may qualify for a streamline refinance with less paperwork and often no appraisal. The VA’s version, the IRRRL, has to pay for itself within 36 months.

When to wait

• You plan to move in the next year or two.
• The savings are small compared to the costs.
• You’ve recently restarted your loan and would be extending your payoff date a lot.

Let someone watch for you

Pete checks in with past clients regularly. When the numbers make sense, you’ll hear about it. Book a free call or read more about refinancing.