Savings

• While homeowners sometimes refinance to reduce monthly payments, refinancing makes the most sense when you can get a lower interest rate and save financing costs over the length of your loan term. Even a fraction of a percentage point could save thousands of dollars of your loan term. A simple equation to determine your monthly interest savings is to subtract your potential mortgage payment with a refinance from your current monthly mortgage payment.
  
  

Costs

• If refinancing is free, a lower interest would almost always mean a refinance decision is warranted. However, refinancing typically includes closing costs, similar to your first mortgage. Though some lenders may offer unique loan programs for existing borrowers, lenders commonly charge application fees, appraisal fees, origination fees, insurance, title fees and other legal costs, according to Lending Tree. The site notes that you generally should refinance when a rate is at least one-half percentage point lower. Otherwise, your savings is likely not enough to justify costs.
  
  

Break-Even Point

• Ultimately, a simple math formula is commonly used by mortgage consultants to establish a simple break-even point. Many lenders even offer calculator tools for homeowners to use on their own. The break-even point is the number of months you have to remain in your home to recoup your investment in closing costs. Divide your closing costs by the amount of your potential monthly savings. For instance, if your closing costs are $3,000 and you will save $200 per month, your basic break-even point is 15 months. In general, if you plan to stay in your home more than 15 months, the refinancing investment makes sense.
  
  

Other Considerations

• While the simple break-even formula is a good guideline on a refinancing decision, other considerations are relevant. Mortgage interest is a major tax deduction for homeowners. When you lower your interest expenses, you also lower your mortgage deduction. Thus, your real savings is less than is often used in the simple break-even calculation. Lending Tree advises you to consider consulting a tax adviser to more thoroughly consider your potential savings. Another potential misleading aspect of your monthly savings on a refinance is that spreading your loan balance out naturally lowers monthly obligations. For instance, if you have 25 years remaining on a 30-year loan, refinancing out to 30 years lowers your monthly installments, not all of which is from lower interest expenses.