Question

You paid $1,498.88 a month (end-of-month payments) for a home with a 6% mortgage over 30 years. Now that mortgage rate has dropped to 3.5% for the same loan, you want to refinance your mortgage up to the original home value. If the closing cost is estimated to be $6,000, how long (in months, rounded to the nearest) before you can break even on the refinance cost?

Answer 1

As interest rate has been dropped from 6% to 3.5%, new mortgage saves you $37.47.

The detaailed calculations are given below.

Given mortgage amount is $1498.88

Interest rate is 6%

So the payment of Interest will be 1498.88*6/100

=$89.93

And the given dropped interest rate is 3.5%

So the new payment of mortgage will be 1498.88*3.5/100

=$52.46

So the saved mortgage rate in a month = $89.93 - $52.46

=$37.47

Given closing costs are $6000

So the break even = Closing costs/ Saved mortgage

=6000/37.47

=160.13 months to break even

If you plan to sell the house before the break even, refinancing is not a good strategy.