When is it worth it to refinance my mortgage loan?

Question: Is there a rule of thumb that says when it’s worth it to refinance a mortgage loan? I have read different things on this subject, and now I’m just confused. When is it worth it to refinance a home loan?

If you’re not familiar with how refinancing works, you might want to start with this helpful article. It explains how the process works, and when it makes sense to do it.

It depends on your goals. Why do you want to refinance? Do you simply want to lower your payments and save money? If so, you’ll need to save more than what you pay in closing costs. That’s when refinancing would make sense.

This brings us to the concept of the break-even point, or BEP. This is when the amount of money you save (through the lower rate) surpasses the money you spend (in closing costs). When you clear this point, you are saving money over the life of the new loan. This is when it’s worth it to refinance the mortgage loan.

Another common reason to refinance is to switch from an ARM loan into a fixed-rate mortgage. So as long as you can accomplish this goal, the refinance loan is worth the effort. Sometimes you can accomplish two goals at once. For example, you might be able to refinance out of an ARM loan while lowering your payments at the same time.

So the first thing you need to do is determine your goals. Are you simply trying to lower your payments and save money? If so, you need to get a low enough rate on the new loan (and keep the loan long enough) to clear the break-even point. Are you trying to switch from an adjustable rate to a fixed-rate mortgage? If so, you need to do this without increasing your payments. This is when it’s worth it to refinance the loan.

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