When does it make sense to refinance your mortgage?

The rates on 30-year, fixed rate mortgages hit historic lows this past week — 4.57% according to Freddie Mac’s data collection.  These low rates may provide a rare opportunity for saving a substantial amount of money through mortgage refinancing.  The essence of mortgage refinancing is just paying off a current mortgage with a new mortgage, presumably with a lower payment, shorter payback time, either, or both.

The catch is that mortgage refinancing isn’t free.  There are loan origination fees, appraisal fees, application fees, etc., that can run into thousands of dollars.  The benefits of refinancing had better outweigh the costs, or it makes no sense to refinance.

But, this begs the question:  How does a borrower determine whether it’s worthwhile to refinance a mortgage or not?  Here are the main things to consider:

  • How long will the new mortgage be kept? The short-term costs of a refinance are high, but the long-term benefits usually outstrip this initial cost.  If you’re planning to sell within a year, it makes little sense to refinance because you wouldn’t have enough time to break even.  If you’re planning to stay in the house for 10 years, then it’s likely that refinancing will save you money if the rate’s enough lower.
  • How much lower is the new rate?  (First, a caveat:  If you have a fixed-rate mortgage, be sure that you’re comparing fixed-rate mortgages and not adjustable-rate mortgages! The ARMs will have lower rates, but they can change after a specified number of years.)  If you’re looking at 1% or more difference, then you’re probably in good shape.  The cost of the refinance will be paid back over a few years, and then the savings begin.  If it’s half a point or less, it might take too long to pay back the refinance cost.

Those are the two main considerations when deciding whether a mortgage refinance is in the cards or not.  If it is, then it’s time to compare mortgage rates to see who wants your business the most!

John Wedding

Husband. Father. Web publisher. Musician. John has blogged at Mighty Bargain Hunter since 2005, helping people to recognize life's good deals.

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  1. says

    I’m always a fan of setting up a basic spreadsheet and using the NPV function to see what makes sense on an expense like a refi. With these rates though, if you haven’t refi’d in the past year, virtually everyone would benefit. I’ve even been thinking about going into a 15 yr at a sub-4% rate. It’s crazy!

  2. says

    If it saves at least $100 a month it may be worthwhile. If you are paying off debt and on a budget and cutting costs in other areas… Otherwise, it may not be wise.

    I mean if you refinance to save $50 a month and you are spending like the Feds in other areas of your life, then why bother?

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