Mortgage Refinancing Costs

• Lenders don't perform refinances for free. Instead, when you refinance your home, the lender charges you fees, including closing costs, application fees and origination fees, which allow the lender to cover the costs of initiating the new loan, closing the old loan and making a profit. The greater these fees, the longer it takes before you break even on your mortgage refinance.
  
  

Monthly Payment

• When you refinance at a lower interest rate, your monthly payment goes down because you pay less interest. To find your monthly savings, subtract your prospective monthly payment from the amount you pay each month on your current mortgage. For example, if you currently pay $1,400 each month and your monthly payment drops to $1,340 after refinancing, subtract $1,340 from $1,400 to get a monthly savings of $60. Though that amount may seem small, it adds up over the years remaining on your mortgage.
  
  

Break-Even Point Formula

• To find the amount of time it will take for you to break even, divide your closing costs by your monthly savings. This gives you the number of months before you recoup the costs of refinancing. If you prefer to know the time in years, divide that result by 12: For example, if you save $60 per month and your refinance totaled $3,240 in closing costs, divide $3,240 by $60 to find your break-even point of 54 months. Divide 54 by 12 to get 4.5 years.
  
  

Other Refinancing Considerations

• When refinancing, take into consideration your current cash available, as well as how long you anticipate remaining in your home. If you don't have the extra money to pay for the closing costs, you may be able to avoid these costs by paying a higher interest rate, which takes away from your monthly savings. In addition, consider how long you plan to keep the refinanced mortgage. If you think you may move or refinance before the break-even point, you'll end up paying more in closing costs than you'll save in monthly payments.