There are few things in life more satisfying than saving thousands of dollars by merely signing a few documents. That’s the allure of refinancing your mortgage when interest rates keep dropping, but with all the various fees and hoops to jump through, is refinancing always a good idea?

Here are a few guidelines to keep in mind to help you determining whether or not it’s the right time to “refi.”

Determine Your Break-Even Point

Using this worksheet from the Federal Reserve, input the payment and fee information of your expected new mortgage and current mortgage. This will help you calculate at which point in the future you will break even, and then start saving money.

Because of the fees involved with refinancing, it may be years before you can recoup your costs. Thinking of moving before you break even? It may be best to stay put with your current mortgage.

Comparing Your Mortgage Loan Options

As you probably remember from when you originally signed your mortgage, mortgage products range widely, there are adjustable rates versus fixed rates, and varying repayment terms. For example, you’ll have larger monthly payments with a 15-year mortgage than a 30-year, but in the long run, you’ll not only pay off the loan much sooner, you’ll end up paying less in interest for the life of the loan.

If you come across a refi offer that sounds too good to be true, be sure to comb through the fine print‚ including fees, to make sure you know what you’re getting into.

Closing Costs: Watch the Fees

One sneaky way mortgage companies try to lure potential clients is by offering a “no-cost refinance.” In this situation, the lender might charge a higher interest rate in order to recoup the closing costs that you are “saving.” Or, the fees might be rolled into your loan. And there may be a prepayment penalty associated with your new mortgage to discourage you from refinancing again in the next few years.

How do you get around this? As the Federal Reserve recommends, make sure your lender explains all up-front costs, principal, rate and payments with your current mortgage and the proposed new mortgage. The law requires lenders to provide a “good faith estimate” with all costs involved in your refinance.

Home Values and Your Credit

It may have been a few years since your original mortgage, and the economy may be different now than it was back then. Your house’s value may be different, too; it may not be worth as much as you think it is, if housing prices have taken a hit in your neighborhood. If your credit score is low or you happen to owe more than you originally borrowed, you might have a hard time finding a lender who will help you refinance with optimal terms.

By doing your due diligence and considering each of these factors, you’ll have a much better sense of whether or not a mortgage refinance is right for you.


Cynthia Drake