Stock image of a hand typing on a calculator, calculating the rate difference to make a refinance make sense.

What rate difference is enough to refinance?

As a loan officer, I hear this question often. Most people believe to make refinancing worth it, the rate difference should be at least a one to two point difference. While interest savings is extremely important, there are several variables that come into play when thinking about refinancing.

The first thing I ask borrowers seeking to refinance is - what are their goals.

  • Are you seeking a lower monthly payment?
  • Are you wanting to borrow on your current equity?
  • Are you looking to change loan terms?

Whatever the answer may be, the main question asked by consumers should always be - what is my break-even point.

The break-even point is where monthly savings offset the cost of refinancing the loan. This is crucial when looking to refinance your mortgage loan. If you plan to sell your home in the near future, you might not even live there long enough to reach a break-even point making refinancing pointless. You will have already paid closing costs but would never reap the benefit of refinancing.

For example, Henry and Susan bought a house eight months ago. When they purchased the house, the rate was 5% with a loan balance of $235,000. Today the interest rate for this refinance scenario is 3.875%. The interest savings is roughly $2,500 a year. Closing costs were 1% of the loan or $2,350, so as long as they plan on living in the house for more than a year, the interest savings will pay for the closing costs.

Another reason to refinance is to decrease the term of the loan. In this scenario, we have Max and Mandy who purchased their house on a 30-year mortgage loan at 4.75% with a balance of $200,000. They decided they would like to pay off the house sooner and are looking at a 15-year mortgage loan. With a rate of 3.25%, their monthly payment only goes up $363 a month, but they also cut their term in half.

Is refinancing right for you? Reach out to a mortgage loan officer at Great Western Bank to see what your break-even point is. Who doesn’t love saving money!

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