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

• September 10th 2010

by UrbanTurf Staff

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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.

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.

If you would like to submit a question for UrbanTurf Reader Asks, send an email to editor2010@urbanturf.com.

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