It’s important for you to clearly define your goals before starting the refinance process. Doing so will make it easier to determine if it’s the right time to refinance your loan as well as to choose the best new mortgage for your situation.
While lowering your interest rate, switching to a fixed-rate mortgage from an adjustable one, shortening your loan term, or tapping into home equity are all typically considered smart reasons for refinancing, if you’re not planning to stay in your home long enough to recoup the costs, you might want to rethink your decision.
The break-even point is the amount of time it will take for you to recover the closing costs on the new loan. It’s calculated based on how much you pay in closing costs and what your new monthly payment will be. For example, let’s say you pay $3,000 in closing costs and a lower interest rate saves you $100 a month off your mortgage payment. It will take you 30 months before you break even. If you’re planning on moving before the break-even period ends, refinancing doesn’t make much sense since you won’t be reaping any significant financial benefits in the long run.
Other possible reasons to refinance include consolidating two mortgage loans into one or eliminating private mortgage insurance (PMI).