Breaking Even with Low Refinance Rates
If you have ever shopped around for refinance rates, you have most likely experienced an overwhelming number of possibilities for your mortgage rate lock for the same home loan scenario. This is because most mortgage refinance lenders will allow a borrower to use discount points to buy down their interest rate. It sounds like a great idea at first, but those discount points can become awfully expensive, and depending upon the length of time you plan to stay in your new mortgage, could be a bad deal for you. Getting the lowest refinance rates on the market is not always the wisest choice for a refinancing homeowner.
Discount points are applied as a percentage of the borrowers total loan amount. One discount point is equal to one percent, so on a $300,000 home mortgage, one discount point would cost the homeowner $3,000. So, you want to figure at what point you will break-even with the discount fee to determine if it’s a good deal for you or not. For instance, if you are refinancing a $300,000 home loan and the par or even refinance rate is 5.0 percent and using one discount point will buy down your rate to a 4.875 percent, you can figure out how long you need to stay in your new mortgage in order for this to be a wise choice by using a refinance mortgage calculator and some division.
On a $300,000 30-year mortgage you will save $22.84 per month using one discount point and it will cost you $3,000. Divide $22.84 into $3,000 and you have your breakeven point of 131 months for the discount point. If you plan to stay in the new mortgage for 30 years, then it looks like a good deal. If not, then you may be paying too much. Remember that discount points are paid upfront with your refinance closing costs, and can raise your loan amount if you are rolling closing costs into your new mortgage.
