UrbanTurf Reader Asks: When Does it Make Sense to Refinance?

by UrbanTurf Staff

In this week's installment of UrbanTurf Reader Asks, a reader who is considering refinancing wonders what the margin of difference should be between an owner's actual interest rate and a potential refinanced interest rate to justify the refinancing costs. We asked Prosperity Mortgage's Tom O'Keefe to weigh in with his thoughts.

UrbanTurf Reader Asks: When Does it Make Sense to Refinance?: Figure 1

I bought a house in DC in June. The rate on my mortgage is 4.875. At the time it seemed like an incredibly low rate, but as interest rates continue to plummet, my question is this:

How big does the difference have to be between one's actual interest rate and a potential refinanced interest rate in order for it to be worth the costs to refinance?

Answer: In most cases, it boils down to the "break even" point. In other words, take the total cost of the refinance and divide it by the proposed monthly savings. If the break even is less or near the timeframe the borrower plans on owning the home, a refinance probably does not make sense. For example, if the total cost of the refinance is $7,000, and it will result in $80 a month in savings, the break even point is 86 months or just over 7 years out.

On the other hand, if the borrower plans on owning the property well past the break even point even a small reduction in rate may be a good idea.

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This article originally published at http://dc.urbanturf.com/articles/blog/urbanturf_reader_asks_when_does_it_make_sense_to_refinance/2460


  1. Bruce said at 12:49 pm on Saturday September 11, 2010:
    You should look into a no cost no fee refinance. I have refinance my 15 year mortgage 3 times in the last year from 4.75 to 4.375 to 4.0 (last week). Each time SunTrust was my servicer. Several of my friends gave done this also. I did this with national Mortgage Alliance and paid no fees except my prepaid insurance and taxes and recordation fee. On the HUD-1, the lender gave a $1300 credit that covered the credit report, appraisal, title search and insurance, and the subordination fee for my HELOC. When I closed the only money I brought to the table was for my escrow account. I am not an employee and do not have any financial interest in National Mortgage Alliance.
  1. ET said at 6:36 pm on Monday September 13, 2010:
    I refinanced a few years ago but that was not only because the value of my house had appreciated quite a bit but I got a new 20-year loan at an interest rate at least 2 points lower that I had. It worked out so well that not only was my interest rate lower resulting in a lower payment but I didn't have to pay PMI which lowered my payment further and will pay less by knocking at least 5-7 years off the life of my loan. All that and I still payed significantly less every month. I am not sure I would refinance again right now because I am not sure it would pay for itself though I could take it down about 1.5 points if I did and went with a 15 year instead.
  1. Doug Francis said at 4:14 pm on Tuesday September 28, 2010:
    I think that Bruce is on the mark because he dealt with his existing lender. recently, two friends have contacted Chase first and they worked to keep their "good" customers by giving them lower rates without appraisals or typical loan apps. (yes, these are done deals) If you have been a good, on-time payer then I suggest calling your existing mortgage company first.

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