Mortgage Refinancing: Are the Closing Costs Worth It?

When refinancing a mortgage, there will always be closing costs involved. These include title fees, insurance, taxes and prepaid points. When considering a mortgage refinance, it is important to understand how much it will cost and whether it is worth it.

Determine How Long You Will Live in the Home

If you are planning on moving in a year or two, a refinance will likely cost you more than you save. If you will be in the home for many years to come and can get a great rate, it may be a wise decision. There is no hard rule about how much lower of a rate you need to be offered in order to be worth refinancing, you must look at the big picture and how long it will take to break even.

Example

If you currently are paying 6 percent on a $100,000 loan, and are considering refinancing to 5 percent, then you will save approximately $63 per month. If your closing costs are 3 percent of the loan, they would equal $3,000. It would take about forty-seven months, or almost four years, to break even. If you were to stay in the home more than four or five years, a refinance would save you money.

 

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