One Number Tells You If Refinancing Pays

When homeowners wonder whether a refinance makes sense, Matt Brady says it comes down to a single number: the break even point. It is what the refinance costs, divided by what it saves you each month. The result shows how many months it takes to earn back your closing costs, and that tells you whether the refinance is worth pursuing. Without this number, it is easy to be drawn in by a lower rate that never actually puts money back in your pocket.

The Three Quarter Point Rule Is a Starting Point, Not an Answer

A popular rule of thumb you see online is to wait for rates to drop about three quarters of a point before refinancing. Matt notes that the real answer depends on your loan size and how long you plan to stay in the home. A larger loan may reach break even sooner on a smaller rate drop, while someone planning to move in a couple of years may never recover the costs. A rule of thumb can point you in a direction, but only your own numbers can confirm it.

How to Work Out Your Own Break Even

Begin by adding up the full cost of the refinance, including lender fees, title charges, and other closing costs. Next, compare your current payment with the proposed new payment to find the monthly savings. Divide the total cost by the monthly savings to get the number of months to break even. If you expect to keep the home well beyond that point, the refinance may be a smart move. If not, it may cost more than it saves. It is also worth checking whether you are resetting your loan term, since that can change the total interest you pay over time.

Never Buy a Home Counting on a Refinance

Bad advice is everywhere right now, and Matt offers a firm warning: never buy a home counting on a refinance. Rates may not fall when you hope, and qualifying later depends on your income, credit, and home value at that time. His guidance is to buy because the payment works today, then treat a refinance as a bonus if it shows up. That approach keeps your budget safe no matter what rates do.

Get Your Break Even Run for Free

If you bought in the last two years, send Matt Brady your current rate and he will run your break even for free, so you can see whether a refinance makes sense for your situation.

Sources

ConsumerFinancialProtectionBureau.gov
FreddieMac.com
Fanniemae.com
Bankrate.com
NerdWallet.com