Boston Homes
- Page 4
How to figure out when to refinance



Q: What is the rule of thumb for determining whether or not a refinance will pay off? Recouping the cost of the refi in two years or less? That is what I have always heard. We bought our house just 18 months ago, but already interest rates have come down by more than a point. We’re wondering if refinancing so soon would be worth it.


A: Like most “rules of thumb,” recouping the cost of the refi in two years or less is actually an over simplification and not always the best way to calculate the savings from a refi.


What makes this so-called “rule” wrong is that it ignores the impact of the refinance on how rapidly the borrower will pay down the total loan balance.


For example, if you add to the loan balance or add to the term of the loan as part of the refi, it will take you longer to pay down the total loan and you may end up paying more over the life of the loan compared to your existing mortgage.


As an example, you may save $100 a month, but add two years to your term or $50,000 to your total loan balance.


If you plan to just exchange your current loan balance and term for a lower interest rate, then figuring out how many months it will take to recoup the cost of the refi is the way to go.


But if you are adding to your loan balance or term (or maybe reducing them), a better way to determine whether a refi will pay off (and by how much) is to compare the total cost of keeping your existing mortgage with the total cost of the new mortgage. In this way, an increase in the loan balance or loan term will be counted as a cost. And vice versa - a reduction in the term or loan balance will be counted as a savings.


A mortgage calculator can help you figure out the total cost of the refi.


Linda Goodspeed is a longtime real estate writer and author of “In and out of Darkness.” Email her at: