Rule of thumb for refinancing and time to recoup closing costs

[Anonymous]

I seem to remember that you needed at least a 1 point difference in your loan rate to make it worthwhile to refinance and you could recoup closing costs in about 2 years.  I think that it has changed as closing costs are most likely lower now with lots of competition so maybe it is 7/8 point.

So, if there is a 3 7/8 point difference between a mortgage loan rate and the current interest rate it makes sense to refinance but what length of time would need to pass in order to recoup closing costs?  I'm thinking less than a year.

forthill

[Lel]

I don't know of any general rule of thumb, but you can quickly figure it out for your specific situation.  Use an online mortgage calculator, plug in your current principal balance, the new interest rate, and the term (e.g.15 or 30 years) and you'll get your new, prospective monthly payment.  Figure out what the closing costs will be (you probably can only make a guessimate, but there's more to it than the point(s) you pay).  Divide the closing cost by the monthly savings and you have your answer in number of months until you break even.

[cobaltnv]

In looking at the savings it is also useful to look at what the payments would be to pay off the new mortgage in the same time period as the old mortgage. e.g if you have had your current 30 year mortgage for 5 years calculate the payment on your refi to pay off in 25 years to compare apples to apples. It is easy to lower your monthly payment by increasing the term of the loan.

[DallasLoanGuy]

rule of thumb? depends on the size of the thumb.
$100k loan and $200k loan get different answers.

real simple: take closing costs and divide by monthly decrease in payment. this gives you a breakeven in months.


example: you refi and save $100 per month and your closing costs are $4000..... then you breakeven in 40 months.

i know, i know.... my example doesnt take into consideration that you rolled in costs.... so sue me for giving you the easy answer for free.

bottom line: if you stay in the loan long enough, it should pay off.


remember..... prepaids are NOT closing costs. however, they can skew the breakeven calculation a little if you roll them into the loan.

best for most is to pay the prepaids at closing and replenish reserves with refunded escrow account