The rule of thumb is that it pays to
refinance
if you can get an
interest rate
at least two percentage points
lower than the rate you’re currently paying. But that’s
not a fixed number — recently, competition between lenders
has helped lower fees, making it worthwhile to refinance with
a drop in rates of only one percentage point.
Nevertheless, refinancing pays off only if
you know you’ll recover the amount it costs you. That means
you should be planning to stay in the home you’re refinancing
long enough to recoup the upfront fees.
Should you refinance?
Everyone’s situation is different. But
if you’re thinking about refinancing, four of the most important
questions to consider are:
How long do you
plan to stay in your house?
How much will you
pay in upfront refinancing costs?
How much lower will
your monthly payments be?
How many years remain
on your current mortgage?
Keep building equity
If you’re far enough along on your current
fixed-rate mortgage
that you’ve begun to chip away at the
principal,
the refinancing decision may be more complicated. That’s
because once you’re a few years into your
mortgage,
you’ve
already paid off a substantial part of the interest. But when
you refinance — like taking out any new mortgage — you’ll
go back to paying mostly interest. That delays repayment of the
principal and postpones building
equity
in your home.
A potential lender or real estate attorney
should be able to help you compare the combined total interest
you’d owe if you refinanced the amount remaining on your
mortgage.
