This Simple Calculation Tells You Exactly When It's Smart to Refinance Your Mortgage

By Nathan Hamilton Markets Fool.com

Credit: Getty Images

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With 30-year fixed mortgage rates spiking from multi-decade lows there may be no better time than now to refinance your mortgage. In fact, 30-year fixed mortgage rates are perched at 4.29% today, well below the nearly 7% rate reached in the last decade. But some homeowners may still be wondering whether refinancing today will help their bottom lines.

Thankfully, homeowners can rely upon a simple breakeven calculation to nail down if refinancing makes financial sense or not. Motley Fool analysts, Kristine Hartjes and Nathan Hamilton, discuss this topic in the below video, highlighting how homeowners can figure out the cost of refinancing to uncover their breakeven points.

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KRISTINE HARJES:

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So we're here today talking about mortgages, and one of the topics I hear a lot about when people are thinking about mortgages is refinancing. When do I want to refinance? Why is it so important? What [does that] even mean?

NATHAN HAMILTON:

Yeah, so we'll touch upon a few things, here. Why you've been hearing a lot about it is because mortgage rates, if you look over the long term, are at multi-decade lows. Now they've come up a little bit from the very lows, but it's still a good time to refinance. And essentially the basics of it are a refinance is taking your existing mortgage that may be at a high rate and getting a lower rate to save money.

KRISTINE HARJES:

Sounds like a great way to save a couple of extra dollars, right?

NATHAN HAMILTON:

Yes, absolutely.

KRISTINE HARJES:

So how, actually, would you know whether it's the right time, now, to go for a refinance?

NATHAN HAMILTON:

It's a good question, because if you look at it, will rates go higher? The Fed has signaled that there may be two or three rate increases in 2017, so mortgage rates may increase. Is now the right time to do it? Some people look at the macro picture and [ask], "OK, what are rates going to do?"

I actually think there's a more concrete way to look at it a simpler process. Just look at the savings that you'll get on your monthly payment and figure out how long you're going to live in your home. Essentially by figuring out those costs you have your breakeven point.

So if you're going to save, say, $2,400 on a mortgage and you're going to stay in your house for the next five years, obviously you're going to pass that breakeven point. That's really what you want to look at. Am I actually going to save money, or am I going to be moving in the next year or two? Maybe it doesn't make as much sense to refinance.

KRISTINE HARJES:

So such a quick and simple calculation can actually be very helpful in figuring out, "Is this right for me?" And we don't want to be predicting the future. Nobody can do that.

NATHAN HAMILTON:

Yes, don't complicate it.

KRISTINE HARJES:

Exactly. With your simple formula you can figure out if this is the right time for [you] to consider this. So if you're looking for more information, you can always go to Fool.com/Mortgages, where you can compare refinancing rates and you can also get in contact with certified lenders. You can even download our free mortgage guide called, "5 Tips To Increase Your Credit Score Over 800."

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