How can I tell whether it is a good time to refinance my mortgage?

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The amount of money you may save and how long you plan to live in your home are key variables that influence whether you should refinance your mortgage. It may be worthwhile if you can lower your monthly payment significantly and plan to remain in your home long enough to recoup the cost of refinancing.

To refinance or not

Consider this example: If you had a $200,000, 30-year mortgage with a 6.5% interest rate, your monthly payment would be $1,264. If you refinanced at 4%, your new monthly payment would be $1,074, a savings of $190 per month. Assuming your new closing costs amounted to $2,000, it would take less than 11 months to break even. ($190 x 11 = $2,095) If you planned to stay in your home for at least 11 more months, then a refinancing would be appropriate under these conditions. If you planned to sell the house before then, you might not want to bother refinancing.

All mortgages are not created equal

When considering whether to refinance, don't choose a mortgage based only on its stated annual percentage rate (APR), because there are many other important variables to consider.
  • The term of the mortgage. Shorter terms can result in significantly reduced interest costs over time. On the other hand, they may require higher monthly payments.
  • The variability of the interest rate. An adjustable rate may be lower initially when compared with a fixed rate, but adjustable rates may move upward over time. With a fixed rate, there is greater certainty regarding your monthly payment over the life of the mortgage.
  • Points. Also known as origination fees, points are paid to a lender or mortgage broker at closing. One point usually equals one percent of the loan's value. Mortgages described as "no-cost" or "zero points" do not carry this upfront cost but may charge a higher interest rate, which may add to the long-term cost of the loan.
  • Other mortgage-related fees. When you refinance, you may pay a mortgage broker fee (assuming you do not go directly to a bank or other lender), a title insurance premium, a commitment fee, attorney or settlement fees, an appraisal fee, and other costs that add up quickly.

How much could you save by refinancing an 8% mortgage?

Rate after
New monthly
Months to
break even
4.50% $1,013 $186 11
4.00% $955 $244 8
3.50% $898 $301 7
3.00% $843 $356 6
2.50% $790 $409 5
2.00% $739 $460 4
Source: DST Systems, Inc. Months to break even rounded up to the next highest month. Does not consider the impact of taxes. (CS0000215)
A homeowner with a 30-year, $200,000 mortgage charging 8% interest would pay $1,468 each month. This table illustrates the potential monthly savings and the various break-even periods (assuming $2,000 in closing costs) that would result from refinancing at different rates.

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The material was authored by a third party, DST Retirement Solutions, LLC, an SS&C company ("SS&C"), not affiliated with Merrill or any of its affiliates and is for information and educational purposes only. The opinions and views expressed do not necessarily reflect the opinions and views of Merrill or any of its affiliates. Any assumptions, opinions and estimates are as of the date of this material and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any recommendation in this material, you should consider whether it is in your best interest based on your particular circumstances and, if necessary, seek professional advice.

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