The answer is complex and involves a number of variables: current principal amount, current interest rate, closing costs, among others. For simplicity, we’ll follow the example of a recent StupidCents.com post with a $160,000 mortgage and current interest rate of 6.50%. We’ll also assume closing costs are $1000 and you want a simple break even time frame of one year.
As with the previous example, the monthly payment on this mortgage is $1,011.31 and to cover the closing costs the payment needs to fall to $927.98 (calc: $1,011.31 – ($1,000/12) = $927.98. The corresponding interest rate with this payment is 5.69%. Anything lower and refinancing makes ‘cents,’ anything higher and it does not.
A graph of this example at various principal levels is below. To calculate your own scenario, use Microsoft Excel. In cell A1, enter the principal value, cell A2 enter the desired montly payment (computed above), monthly payments remaining in cell A3, and in cell A4 enter the formula: =RATE(A3,A2*-1,A1)*12.
Feel free to comment or ask questions utilizing the comment section below.
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It is really an interesting discussion on refinancing and mortgage rates. Since, the answer is not straight forward due to complexity involving various inconsistent factors like; principal, interest rate etc., it is wise to understand the underlying principle.
Everyone prefers a variable-rate mortgage and as usual low mortgage rates are good news for the few who are able to refinance. However, it a very informative post.
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