It was a good rule of thumb to refinance when interest rates were two points lower than your current mortgage rate. But because closing costs are so low these days, even a one percent difference can save you money on your interest costs. Even if the fees are low, it's only worth it to refinance if you're sure you'll be able to get your money back.
Adding up the costs
To refinance, you just pay off your old loan and get a new one. You will probably have to pay the same fees for the second mortgage as you did for the first. Most of the time, the costs of a $200,000 loan are between $2,000 and $6,000. You will also have to add points to get a lower interest rate, which will add thousands more. You can only get these costs back if you keep your mortgage for a long time.
Rates of interest
For refinancing to be financially worthwhile, you need to make sure that interest rates are low enough to cover the cost of refinancing. Using a mortgage interest calculator on one of the lending sites is a simple way to figure this out. These calculators will give you an idea of how much your monthly payment will be and how much the interest will cost in total. You can see how much you could save by putting in different interest rates.
Short-run
You need to compare terms as well as interest rates. Less interest will be due on a loan if it is paid back quickly. When you refinance, choose a loan with a shorter term if you can. You can also choose a biweekly mortgage, in which you pay half of your mortgage payment every other week. This can cut the length of your loan by years.
Finding Low Cost Lenders
Not all lenders have the same fees or interest rates, so if you look for lenders, you could save thousands of dollars. You can easily get quotes from the big mortgage lenders, but some smaller financing companies have better deals. A site for an online mortgage broker is the best way to find them. Basically, you put in some basic information about yourself and your income, and then you get a few different quotes. From this list, you can figure out who has the best refinancing package.
