Key ideas

1. Break-even equals closing costs divided by monthly savings. Alex's $6,000 in costs ÷ $180.63 saved a month = 34 months to earn the costs back.
2. Keep the term no longer than you have left. A fresh 30-year loan lowers the payment but adds years of interest. Match your remaining years, or go shorter.
3. Refinancing has closing costs, like buying did. You get a new Loan Estimate and Closing Disclosure. A no-cost refinance hides the costs in a higher rate or bigger loan.

Vocabulary

Refinancing

Replacing an existing loan with a new one, usually to get a lower interest rate, a lower payment or a different term.

Closing costs

The fees and prepaid bills you pay to get a mortgage and transfer a home, on top of the down payment.

Credit score

A 3-digit number, usually from 300 to 850, that predicts how likely you are to repay debt on time. Lenders use it to set rates.

Private mortgage insurance

Insurance a lender usually requires on a conventional mortgage with less than 20% down. You pay for it, but it protects the lender if you stop paying.

Principal

The amount you borrowed, or the part of your balance that is still owed, not counting interest.

Loan Estimate

A standard three-page form a lender must give you within three business days of a mortgage application, showing the rate, payment and closing costs.

Work it out

Alex owes $280,000 at 7.25% with 27 years left. A lender offers 6.25% on a 27-year loan, with $6,000 in closing costs. The rates are made up for the example.

1. Current payment at 7.25%
2. New 27-year payment at 6.25%
3. Saved per month
4. Closing costs
5. Break-even
6. Interest left on the old loan
7. Interest on the new loan
8. Closing costs
9. Saved if Alex keeps the loan

Check yourself

1. A refinance costs $4,500 and saves $150 a month. How many months to break even?

   • A. 15 months
   • B. 45 months
   • C. 30 months
   • D. 300 months

2. You have 22 years left on your mortgage. Which new term keeps your payoff date the same or sooner?

   • A. 30 years
   • B. 20 years
   • C. 25 years

3. What is a no-closing-cost refinance, really?

   • A. A loan with costs paid by a higher rate or a bigger balance
   • B. A government grant
   • C. A loan with no fees at all
   • D. A refinance with the same lender

Your turn

Find your current balance, rate and years left on your latest mortgage statement. Then ask one lender for a Loan Estimate with a term no longer than your remaining years, and divide its total costs by your monthly savings.