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As a Credible authority on mortgages, Chris Jennings covers topics including home loans and mortgage refinancing. His work has appeared in Fox Business and GOBankingRates.
A mortgage refinance comes with various closing costs, just like your first loan did. There are origination fees, application fees, escrow costs, points, appraisal fees, and many other expenses. All in all, you can expect to pay around $5,000 to refinance your mortgage.
Reaching the breakeven point — when the refinance saves you more than it cost to execute — is what you aim for to make those costs worth it.
For example, let’s say your refinance costs $5,000, but it reduces your monthly payment by $100 — you’d reach your breakeven point in 50 months (a little over four years). If you don’t think you’ll remain in the home for that long, then refinancing might not be worth it.
Our refinance breakeven calculator can help you determine your unique breakeven point. It can also help you compare the monthly payments on your current loan and your refinance, so you can accurately calculate your savings.
Once you know your breakeven point, you can determine if a refinance is a smart move. It might also guide you on how long you should remain in the home.
To use the calculator, you’ll need the following bits of information:
Current principal: The remaining balance on your original mortgage.
Current term: Your original loan term in years.
Remaining term: The number of years left on your original loan term. If you’re five years into a 30-year loan, for example, you’d enter 25.
Current interest rate: The interest rate of your current mortgage.
New rate: If you’re not sure what new interest rate you may qualify for, fill out this form and get personalized rate estimates. It only takes a few minutes, and it won’t affect your credit score.
New term: How long you’d like your new loan to be. Most homeowners choose 15-year or 30-year terms.
Closing costs: The average refinance costs around $5,000, though it varies by location and loan amount. If you want the most accurate number, get pre-approved. You’ll receive a loan estimate that details your total projected closing costs.
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Credible’s breakeven calculator can be a helpful tool when deciding whether or not to refinance.
Additionally, you’ll also want to think about:
Long-term savings: If the refinance can reduce your interest costs over the long haul, it’s usually a good move.
Cash flow: Lowering your monthly payment can free up extra cash. That could mean less financial pressure or even more funds to put toward investments or retirement.
Pay-off timeline: Refinancing may allow you to shorten your loan term, which means paying off your loan faster.
Considering upcoming expenses is wise, too. With a cash-out refinance, you can turn your home equity into cash. This can be helpful if you need to cover sudden medical bills, college tuition, or other significant costs.
If the breakeven point makes sense and the situation seems right for your household, then it’s time to begin the refinancing process. To start, you’ll want to research lenders.
Contrary to popular belief, you don’t have to use your old lender when refinancing your loan. In fact, you might even get better rates if you look elsewhere.
To do this, get pre-approved offers from at least three to five different mortgage lenders, and use their loan estimates to compare costs and terms. Credible can help you compare refinance rates and give you a better idea of how much you can afford.
You’ll specifically want to look at origination fees, points, application fees, and other lender-side expenses. The monthly payments, APR, and total cash required at closing are also important.