How Can I Calculate If Refinancing My Home Loan Is Cost Efficient?

How can I calculate if refinancing my home loan is cost effective? Read here to learn how to calculate the benefit of refinancing!

Since interest rates are at all time lows, many people are looking to refinance their home loan. Prior to refinancing, everyone should carefully consider the costs to refinance and determine whether it is truly cost effective.

Determine the Costs

The first step in how to calculate if refinancing your home loan is cost effective is to determine the costs of refinancing your home loan. The largest detriment to refinancing a home is the fees. Between points paid to the lender, appraisal fees, legal fees, title fees and other fees, total fees end up costing up to 2% of the amount borrowed. For a $300,000 mortgage, these fees can be as high as $6,000.

Determine the Savings

The next in how to calculate if refinancing your home loan is cost effective is to determine the monthly savings. If you have a $300,000 30-year mortgage at 6% interest, your payment would be $1,798 per month. If you are able to refinance into a 5% interest rate mortgage, your payment would fall to $1,610 per month. While it appears your savings would be $188 per month, you need to consider that your tax deductions will also decrease by the same amount. Therefore, if you are in the 25% tax bracket, your net savings are only $141 per month.

Calculate the Effectiveness

The last step how to calculate if refinancing your home loan is cost effective is to calculate. Using the example from above, total costs would be around $6,000 while net monthly savings would be $141. Therefore, it would take 43 months ($6,000 / $141) to break even on the deal. If you won’t be in your home for more than 43 months, it would not be cost effective to refinance.

How Can I Calculate If Refinancing My Home Loan Is Cost Efficient?

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