Finding Your Break-Even Point for a Mortgage Refinance

Forget the old wives' tale that it only makes sense to refinance your mortgage when you can reduce your rate by 2%. Hogwash to the rule that you need to stay in your house for seven years for a mortgage refinancing to make sense. The truth is that your net savings (or loss) depends upon a number of different factors that must be considered, not just an arbitrary number that someone once mentioned over a beer at the local watering hole.

Two of the most important factors to consider are the costs of refinancing, and the length of time you plan to stay in your home. Closing costs vary widely based upon what part of the country you live in. Unfortunately, due to high relative title insurance costs, Texas is one of the more expensive states in which to refinance. In the Houston area, the average fees associated with refinancing a $200,000 loan amount to $3,975 according to BankRate's 2008 annual survey of closing costs. These fees do not include prepaid items such as property taxes, hazard insurance, and prepaid interest. New York and Florida round out the top three states in terms of average closing costs.

When [spin]calculating|figuring out[\spin] closing costs, be sure not to include your taxes and insurance as these are costs you would be paying regardless of whether you refinance or not. Taxes and insurance costs in states like Florida and Texas, which are more [spin]inclined|prone|given[\spin] to natural disaster and which rely more heavily on property taxes to fund state and local operations, can be considerable so don't let these expenses cloud your judgement.

The second major factor is the [spin]amount|extent|length[\spin] of time you plan to be in your home. The industry average is five to seven years, so this is a [spin]great|good|excellent[\spin] place to start. Often, homeowners overestimate the number of years they will remain in their home. Factors such as unplanned job relocation, family illness, and changing social dynamics have made our society far more mobile than we were 25 years ago. The longer you plan to be in your home, the more likely refinancing to a lower rate will make financial sense.

You will also need to identify your objectives in refinancing your mortgage. These objectives will dictate the factors to consider in calculating your breakeven point. You will find that doing this calculation is far easier if you are doing a straight rate and term refinance because you can look at your absolute interest savings. On the other hand, If you are looking to tap into your home equity to fund college costs for example, your interest savings is only part of the picture. You will also need to consider what alternatives will cost for college funding. Most government-subsidized student loans carry rates from 5.5% to 8.5%, and private student loans often offer only variable rates. Funding home improvements from equity should be weighed against the increase in home value from that new kitchen or bath.

Finally, you should compare lenders and the rates and terms they are offering. The easiest way to do this is through a Good Faith Estimate. This document will detail the various costs associated with your home refinance, allowing you to make an apples-to-apples comparison. One lender may charge you a rate that is .25% lower, but fees that more than make up for that discounted rate. As with any major purchase, being a smart consumer can save you thousands.

Mike Lesmeister, CRMS, is Co-Owner and Executive Vice Presdient with Home Loan Specialists, a Houston-based mortgage lender serving Spring, Woodlands, Tomball, Conroe and Houston, TX. Mike holds a B.A. in Economics from Wake Forest University and an M.S. from Oklahoma State. He can be reached at MikeL@hlstx.com.