Will Refinancing Save You Money?

The general rule of thumb is that if you can refinance to a new mortgage rate that is at least 1% lower than your current rate, it’s a good idea. But there are other things to consider in that decision, namely any closing costs associated with completing the refinance. This refinance calculator will tell you exactly how many months it would take you to recoup the closing costs through decreased interest, which is useful for a few reasons.

First, if you’re planning to move in the foreseeable future, you may find that the breakeven date is beyond when you may actually get there. This is what we found when we evaluated a refinance opportunity. Assuming you’re planning to stay in your house indefinitely, then knowing the breakeven date can help you decide how to actually fund those closing costs. If you have the cash in a savings account, it also lets you know how long it will take to rebuild your balance, assuming you take the monthly interest savings and deposit it to your savings.

What if you don’t actually have the cash available? It can be tempting to roll the closing costs into the new loan, but then you’re paying interest on that as well. An alternative strategy could be to use a 0% interest credit card to pay the closing costs (beware of any fees if you have to use it for a cash advance) then use your savings to pay off the card.

Where the breakeven date comes in handy is that it tells you whether or not this strategy will work. If you have a card with a promo rate that runs out in 10 months but your breakeven is 12 months, then it may be a bum deal. You’ll be paying credit card interest for those last two months, so make sure you enter that into your calculation.

Refinancing can be a great way to lower your payment. Try to keep the new loan term as close to your original loan’s term as well. Otherwise, you may have a lower rate and lower payment, but the total interest could still be higher if you spread it out over more years.

Finally, I find that a lot of people avoid finding out what rate they qualify for because they’re concerned that the hard inquiry into their credit will lower their score. It’s true that too many hard inquiries (when a lender actually pulls your credit to evaluate you for a loan) can have a detrimental effect on your credit score, but the character of the inquiry matters too. Applying for a mortgage refinance is unlikely to knock your score down enough to make a difference. What hurts is when you hit the mall and open up multiple store cards to save on your purchase. Take a break from those types of credit applications within six months of applying for any type of loan.

 

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