The refinance break-even, done honestly

The basic arithmetic

Take the total cost of the refinance and divide it by the monthly savings. The result is the number of months until the refinance has paid for itself. If you expect to keep the loan longer than that, it saves money; if you may sell or refinance again before then, it does not.

Mistake one: ignoring the term reset

A new 30-year loan starts the amortization clock over. If you are five years into a 30-year loan and refinance into another 30-year loan, the payment may drop while the total interest over the life of the debt goes up. The fix is to compare total cost over the same horizon, or to choose a new term that matches the time left on the old loan. Troy can set the new loan to 25, 20 or 15 years so the comparison is apples to apples.

Mistake two: counting the skipped payment as savings

Between the last payment on the old loan and the first on the new one there is a month without a mortgage payment. It feels like a gift. It is not: interest for those days is collected at closing. Leave it out of the savings column.

Costs, credits and the honest comparison

You can pay closing costs up front, roll them into the balance or accept a slightly higher rate in exchange for a lender credit that covers them. Each produces a different break-even. Troy prices all three and lays them next to your current loan on one page, so the decision is made on numbers rather than on a feeling about the rate.

• Current loan: balance, rate, payment, months remaining
• New loan at each cost structure: payment, costs, break-even month
• Total paid over the horizon you actually expect to keep the home