The Refinancing Rule of Thumb

Refinancing is expensive. Closing costs are typically 2% to 5% of the loan amount. That's why the Break-Even Point is the most critical number.

How to Calculate Break-Even

Total Closing Costs รท Monthly Savings = Months to Break Even

For example, if it costs you $4,000 to refinance and you save $200 per month, it will take you 20 months to recover that cost. If you plan to move in 12 months, refinancing would actually lose you money.

When Should You Refinance?

  • To Lower Rate: If you can drop your rate by 0.75% to 1.0%, it is usually worth investigating.
  • To Remove PMI: If your home value has increased enough to reach 20% equity, refinancing can eliminate Private Mortgage Insurance.
  • To Switch Terms: Refinancing from a 30-year to a 15-year loan raises your payment but saves massive amounts of interest.