When to Refinance a Mortgage?

Consider refinancing your home when interest rates go down. The easiest way is to request quotes with various lenders while factoring in closing costs and expenses, and any change in the loan length.

One rule of thumb is that you should refinance if the interest rates drop by 2%. Another rule was the 2-2-2 rule. Refinance if you have been in your house for 2 years, the interest rates have dropped by 2%, and you plan on being in your house another 2 years. More recently, some say that you should refinance if rates drop only 1%.

There are several reasons to refinance your home: 1. You wish to save money by paying less interest; 2. You need cash that is currently tied up in your home, 3. You wish to lower your monthly payment; or 4. You wish to change the terms of your loan, from an adjustable rate to a fixed rate, for example.

The decision to refinance depends on several factors: the interest rates, the closing costs, the length of the mortgage, and the length of time you will be staying in the house. It doesn’t make sense to refinance if you are planning on selling in a year or two.

Find your total closing costs. Your lender can give you a good faith estimate. If your new monthly payment is lower, then how many months will it take you to get back these closing costs? Once you have recouped the closing costs, you are coming out ahead. For example, if the closing costs are $2,000 but your new monthly payment is $100 less, then you will pay off the closing costs in about 20 months. At that point you will be coming out $100 ahead each month.

In summary, consider the closing costs, don’t lengthen your loan, don’t refinance often unless you get very low closing costs (or none at all), be sure to stay in the house at least until you recoup your closing costs, and always consider total interest over the course of the loan. Refinancing smart can save you a lot of money.