Mortgage Refinancing - Rule of Thumb for When to Refinance

A good rule of thumb is if the cost break-even point is three years or less, you should refinance. If it takes three to five years to recoup the costs, weigh your decision carefully. If longer than five years it is probably not advisable to refinance. (To find your break-even point take the cost of getting your mortgage refinanced and divide that by the monthly payment savings. This will tell you how many months it will take you to break even on the costs and start saving money over the long term.) If you plan on staying in the home past this future date, you should refinance.

Timing the interest rate market is difficult. There is a common misconception that you need to save 2%--but this applied when consumers owed $30,000 to $40,000 on their homes. At the average home in the $150,000 range today, even a 1% savings may be worthwhile. If you are consolidating bills or paying off a second mortgage, the mortgage interest rate could even rise and save you money. Look at the entire picture of your finances as they are now and look at all the refinance options. It could be worth your time to talk with an experienced loan officer. Then choose what puts you in the best financial position.

Many homeowners consider refinancing when interest rates suddenly fall or there's a change in financial circumstances. But even though a large decline in rates or an opportunity to pay off debts might make refinancing seem like an easy decision, you shouldn't consider any single variable on its own. Think about how long you plan to stay in your home, how you plan to use your equity and how a refinance will support your overall financial goals.

There are some situations in which a refinancing decision should invariably be made:

If you are able to negotiate a no-cost mortgage (you pay no points or closing costs) and if the new mortgage rate is lower than your existing rate, then refinancing your loan would certainly be of financial benefit to you.
If the remaining mortgage balance, including points and closing costs, can be refinanced at a reduced monthly payment and still be paid off within your existing mortgage payment term, then refinancing would be highly advisable.
If you need extra cash for a home equity or auto loan and the mortgage rate is lower than alternative loan rates, then refinancing is probably the best choice.
Lastly, you can generally count on it being time to refinance when your new mortgage rate is at least one to two points lower than your existing rate and you plan to stay in your home for at least three to five years.