If you have a $300,000 balance on your mortgage and you refinance to a new 30-year loan, lowering your interest rate from 3.75% to 3.25% will save around $84 per month or $1,008 per year. If you can reduce the rate by 1%, from 3.75% to 2.75%, your monthly savings would be $165 per month or $1,980 per year.
Of course, you don’t have to refinance into another 30-year loan. If your finances have improved and you can afford higher monthly payments you can refinance your 30-year loan into a 15-year fixed-rate mortgage, which will allow you to pay the loan off faster and also pay less interest.
Taking a look at your monthly savings is just one part of the refi equation, however. You also need to factor in the cost of switching out your loan and how long it will take you to recover those costs, or ‘break even’.
Just as with a purchase loan, you’ll have to pay closing costs on a refinance. These costs can include origination and applications fees, appraisal and inspection costs and title search fees. In all, closing costs can run between 3% and 6% of the total loan amount being refinanced.
You can determine your breakeven point by dividing your total closing costs by the amount you’ll save each month. The result is the number of months it will take you to recoup the refinance cost and start saving money. The less time it takes to break even, the more sense it makes to refinance your home loan.