I’m often asked "how many months will I break even on a refi?"    This is actually something very easy to figure out and worthwhile for anyone who’s considering restructuring their mortgage.  In a nutshell, you are taking the non-reoccurring closing costs and dividing the difference between your current mortgage payment and your proposed mortgage payment.   

To determine your closing costs, you are going to consider all fees except for your reserve account and prepaids (taxes, insurance and prorated interest).  This is what you are paying for your interest rate to refinance the mortgage. Your prepaids should not be factored into your closing costs because your existing balance of your prepaids/reserves from your current lender will be refunded to a few weeks after closing the new mortgage.   If you don’t wish to have your new reserve account financed into the new mortgage, you can bring cash to the closing table (a majority roll this cost into the new mortgage; but it’s totally up to you).  You can also opt to waive your reserve account all together if you meet the criteria, just know that there is a cost to doing this.

Next factor the difference between your current mortgage payment and your proposed mortgage payment.  Ideally, you should look at just principal, interest and mortgage insurance (excluding taxes and insurance).  Divide this figure into the closing costs and you have how many month’s it takes to break even on the refinance.

Here’s an example from a recent Good Faith Estimate I recently provided a client:

• Current Payment: $1740 less the Proposed Payment: $1550 equals a monthly savings of $190.
• Closing costs (excluding taxes, insurance and prepaid interest (Sections 900 – 1000 on the GFE) are $2390.   2390 divided by 190 equals 12.58 months to break even on the cost of the refinance.

If the borrower is staying in their home for over 13 months, the refinance makes sense.   They are "breaking even" on the cost of the refinance.   If the homeowner was only improving their monthly payment by $50 a month, it would take about 4 years to break even.   Does it still make sense?  This really depends on the individual home owner.  If they’re not likely to move and if the rate is low enough to where they’re not likely to refi, perhaps it still does.  This is just a tool to help consumers weigh the cost of refinancing.   Different pricing, such as with or without points or without closing costs, will also impact how soon someone will "break even" on their refi.   Watch for a follow up post on that!

Last night I posted that the 30 year fixed rate was at 5.625%…this morning, rates have been moving upwards (I’m all ready receiving new rate sheets from this morning for the worse).  Now may be the time to consider taking advantage of rates being below 6%.   

Just to recap…you should consider refinancing if:

• You have an Adjustable Rate Mortgage with the fixed period ending in 24 months or less.
• You have a 30 year fixed rate mortgage over 6.5%.
• You have a piggy back (second) mortgage and enough equity to restructure the debt.
• You are paying private mortgage insurance.
• If you are concerned about the value of your home declining now or in the future (there are loan to value limits on refinances).   

If you’re concerned about your credit scores, FHA may be a great alternative for you as long as your credit history is fine.

If you have a prepayment penalty, it may or may not be worth refinancing at this time.  The penalty is considered prepaid interest so it does qualify as deductible mortgage interest (a small consolation).   

Questions?  Ask!  Don’t wait.   Mortgage rates change constantly and these days, mortgage programs do, too.    I’m here to help!   If you are unsure of your scenario, please contact your trusted Mortgage Professional right away.   It may be that you’re doing fine just where you’re at with your current mortgage and you need to do nothing…if so, at the very least, that 10 minute conversation with your CMPS provided you with a little piece of mind during these turbulent times in the mortgage industry.

PS:  NOW may also be a great time to buy and take advantage of 30 year fixed rates under 6.00%!