To reduce your interest rate

This is one of the most common refinance situation when rates are low. What is often asked is, “How much lower does the new rate need to be for the refinance to make sense?” The answer to this question always comes back to cost. In truth, if the refinance doesn’t cost you anything and you can save .125% over your existing rate, then the refinance makes sense. This is rarely the case, but the answer still comes back to cost. Here is an example:

If it costs you $2000 to refinance, and dropping your rate by .5% saves you $75 per month. Then the breakeven point on your refinance is the cost divided by the interest savings.

$2000 / $75 per month = 26.6 months to breakeven

As long as you anticipate being in the home longer than 26.6 months then the refinance makes sense. This example should begin to illustrate how cost factors into your ability to rationalize a refinance. If the cost were $10,000 to save $75 per month, your breakeven point would be beyond 11 years. Cost is as important as rate when considering a refinance.

Learn more: Refinance

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