A recent question was asked with respect to refinancing a property for a lower payment. The questioner asked if lowering his payment by $200 per month would make sense. My answer was simple…”it depends.”
There are many variables to consider when refinancing a property…not just rate and payment. The two biggest considerations are closing costs and hold time. If you know those, you will be better equipped to make an informed decision.
Let’s say that you have a mortgage of $100,000 at 6% with payments of $1114.48 with 120 months remaining. You discover that you can refinance it down to a 5% rate, but it will cost you $3500 in closings costs to do so. If you keep the same remaining term (120 months), your payments would drop to $1015.15 per month.
If you take the amount of savings, in this case $99.33/mo ($1114.48-$1015.15) and you divide that figure into closing costs you would have to pay ($3500), you find that your savings per month would eat up the closing costs paid in 35.24 months. That becomes your break even point.
If you are going to hold the property for longer than 36 months, then the refinance might be a good idea. If, however, you plan on liquidating the property prior to the 36-month mark, then you would have lost money by refinancing.
Of course, these aren’t the only considerations to take into account when refinancing, but they certainly make it much easier to understand where that break-even point stands so that you can make an intelligent decision.