How Long Should You Stay in a Home Before Refinancing Your Mortgage?
Refinancing a mortgage can lower your interest rate, reduce your monthly payment, or help you pay off your loan sooner. But there’s no universal rule for when refinancing makes sense. Your mortgage interest rate, the interest rates you qualify for now, your financial situation, and how long you plan to stay in your home are all factors to consider before making your decision.
The Role of Closing Costs
Every refinance comes with closing costs, often ranging from 2% to 5% of the loan amount. This money goes toward:
Application and origination fees
Appraisal and title costs
Recording and administrative charges
Those upfront costs can eat into the savings. For example, if refinancing reduces your monthly payment by $200 but costs $6,000 in fees, you would need to stay in your home 30 months before breaking even. If you sell or move before then, you may not come out ahead.
How Long You Plan to Stay
Some homeowners focus on the total projected savings over the full loan term, but that’s not always the key number to consider. Most homeowners only spend 10 to 15 years in a home, and even less time with their original mortgage. That is why focusing on savings based on the full 30-year term is less useful than identifying your break-even point.
If you know you’ll likely move in five years, you’ll want to see if the refinance pays for itself within that shorter timeframe.
Equity and Loan-to-Value Considerations
Your home’s equity, the portion you’ve paid off compared to what you owe, also influences when refinancing is worthwhile. The more equity you have, the better the loan terms you can usually secure.
Interest Rate Drops
Mortgage rates don’t stay the same. A significant drop in rates, or an improved credit score that qualifies borrowers for a better rate, is often the main reason homeowners refinance. The larger the difference between your current rate and available rates, the more quickly you’ll recoup your closing costs.
As a general guideline, refinancing becomes more attractive when you can lower your rate by at least 0.5% to 1%.
Term Changes and Loan Reset
Another factor to consider is the loan term itself. Refinancing often means starting a new 30-year mortgage, which can reset the clock on your payoff. If you refinance to lower your monthly payments, it may increase the total interest you pay over time.
Some homeowners prefer to refinance into a shorter term, such as a 15-year mortgage. This typically comes with higher monthly payments, but it can result in big savings on interest in the long run.
Think carefully about whether resetting your loan term fits your financial plans. Sometimes the immediate monthly relief is worth it, while in other cases it makes more sense to continue paying down your current schedule.
The Break-Even Point
To calculate your break-even point, divide your total refinance costs by your monthly savings. If the result is less time than you plan to remain in the home, refinancing may be worthwhile. If not, you could end up spending more than you save.
Break-Even Point Math Example
Closing costs: $5,000
Monthly savings: $150
Break-even: 33 months (just under three years)
If you plan to stay in your home five years or more, you’d likely benefit. If you plan to move in two years, you would spend more in closing costs than you would save.
Are You Thinking About Refinancing Your Home in Ouachita Parish?
Ouachita Valley Federal Credit Union can help you run the numbers and determine the break-even point for your available refinancing options. Our team will walk you through closing costs, break-even calculations, and loan term choices so you can make the decision with confidence.
Call us at 318.387.4592, view our current loan rates, or start your mortgage application online today.
