Though the true refinance boom of the last few years is starting to wane, there are still many homeowners finding real value in a refinance for a number of reasons. For some, the value comes by lowering the monthly cost of the mortgage. For others, they like the idea of saving tens, or even hundreds, of thousands of dollars in interest by restructuring a mortgage. And for still others, the benefit comes from getting out of an adjustable rate mortgage and into something fixed. But if you are considering refinancing your home, there are a few important things to consider before you pull the trigger which will help you determine your breakeven point.

First and foremost, you want to make sure you are doing it for the right reasons. Closing costs can be expensive depending upon the loan program and terms you go with. Add in upfront escrow costs, points if you want to buy down your rate, and any upfront mortgage insurance costs which may apply, and you can be talking about some serious money being put back into the principal of the mortgage. So if you are doing it for a short term reason, you may want to reconsider.

Now as a general rule of thumb, you want to be in the home for long enough to save the closing costs in monthly savings, in interest, or in accelerated principle paid off. So, if you are saving $500 a month and plan to be in your home for 5 more years, you will save out of pocket $30,000. So you should have no problem covering the closing costs, right?

Well, not so fast. You need to understand your amortization table to see how much of your payments will pay principle verse interest, because an important factor in determining breakeven is how much you still owe on your mortgage. When you take out a mortgage, an amortization table is created, which shows how much principle and interest is paid per month. In the beginning, you are paying almost all interest, and with time your payments become almost all principle. So if you are halfway through your mortgage, you have prepaid the majority of your interest and are starting to pay some serious principle down.

So back to the earlier example, if, after 5 years, you will owe $350,000 if you do not refinance and $380,000 if you do, because you are restarting your amortization table, then there is no real savings. So this refinance probably wouldn’t make sense, unless you need to lower your monthly obligations, in which case saving $500 is still $500 less per month out of your pocket.

Finally, you need to think about taxes. What your tax bracket is will have both short and long term consequences if you refinance. It will impact how much, if any, of your mortgage interest is deductible, how you are taxed, if you are, for the refinance upfront, and if any, or all, of the closing costs will be tax deductible.

So in a nutshell, you need to factor in closing costs, your tax bracket, how long you plan to stay in the house, and the overall interest savings, as well as the change in the monthly payment. Ross Mortgage has a great calculator which does factor in all of these things, and is a great starting point to see if refinancing could be right for you. But if you are really serious about refinancing, you need to find a qualified mortgage officer who can truly help you determine if a refinance makes financial sense for you.

If you would like to see if a refinance is a good option for you, please feel free to contact me and I will go over your personal situation with you. If you have anything else to add about how to determine the breakeven point on a refinance, please leave a comment.