When Should I Refinance?
At some point during the life of your mortgage, you will probably want to consider refinancing, or re-doing your loan. You may want to reduce your interest rate, lower your monthly payment, consolidate multiple loans, or obtain cash for a remodeling project or childs education. No matter the reason for refinancing, the main question in deciding when, or even whether, to refinance is how long it will take to recoup the costs.
Refinancing a mortgage is not free. Because you are essentially getting a new loan, you will be paying closing costs again. The lender will need a new appraisal of the house and a new credit report, among other things. In order to determine whether savings from a lower monthly payment will be able to offset these costs, you need to know how long you plan on staying in the home.
First, determine what your new monthly payment would be if you were to refinance. Subtract this amount from your current monthly payment to determine how much you will save each month. Divide the closing costs of refinancing by the monthly savings to find out the number of months it will take to recoup the closing costs.
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