Do the math

No. 2 above requires some calculation on your part. To figure it out, you’ll need to know:

• The closing costs for a new loan. Ask potential lenders—costs usually run 3% to 6% of the loan amount. Lenders may finance these costs (that is, fold them into your loan amount), so you don’t actually have to write a check, but you’re still paying for it.
• Your current mortgage payment.
• Your potential new payment. Again, your lender can give you this.
• The length of time you plan to keep your home.

To simplify these calculations, do a quick search online for various free mortgage refinance calculators, which can be found on many bank sites.

Find your breakeven point

Here’s an example of how a mortgage refinance might play out with a typical 30-year fixed-rate mortgage:

 Amount refinanced \$200,000 Closing costs for new loan 4%, or \$8,000 Current mortgage 6%, or \$1,199 per month New mortgage 5%, or \$1,074 per month Monthly savings \$125

But even though you start paying the lower rate right away, you’ve shelled out \$8,000 in closing costs, and you aren’t ahead of the game on your mortgage refinance until you’ve paid that off. At \$125 in monthly savings you have to stay in your home 64 months—more than five years—to make it worth it (\$125 x 64 months = \$8,000). Move before then, and you’ve lost on the deal.

However, if you remain for 10 years, for example, you’ll have saved \$7,000.

It gets better

Although 1% is the rule-of-thumb minimum for a mortgage refinance, lower rates can make refinancing even more attractive, as the breakeven period becomes shorter.

Consider the above mortgage refinance scenario if you could shave another half-point:

 Amount refinanced \$200,000 Closing costs for new loan 4%, or \$8,000 Current mortgage 6%, or \$1,199 per month New mortgage 4.5%, or \$1,013 per month Monthly savings \$186

You now reach the breakeven point in just over 3.5 years.

Another way to improve your position

Two additional factors can make a mortgage refinance an even better option:

• Your credit rating has improved since your last mortgage. Go to AnnualCreditReport.com to monitor improvements.
• You’ve started earning more money.

Both these factors make you a more desirable candidate in lenders eyes’ for a mortgage refinance, possibly allowing you to negotiate lower interest rates or lower closing costs, further shortening your breakeven period.

The bottom line is that you shouldn’t seek out a mortgage refinance just because “everyone is doing it.” It needs to make financial sense for you.