Many people erroneously believe that you must reduce your rate by 2% to justify refinancing. A 1% lower rate on a $100,000 mortgage can save you $70 per month. A ½% reduction on a $250,000 loan can save $87.50 per month. Refinancing requires the payment of certain fees to the lender as well as closing costs that are not paid to the lender. Lender fees may include appraisal, credit report, flood certification, processing, and others. Usually, these fees range from $600 - $750, assuming no points and no origination fee. Closing expenses include the cost of your attorney or title agent, title search, title insurance and other fees, and typically range from $1000 to $2000, depending on the loan amount.

People refinance in order to obtain a lower rate of interest, to reduce the term of their loan, to take out equity, or to convert from an adjustable to a fixed rate. If you are refinancing a fixed rate loan to a new fixed rate loan of the same term and loan amount, the breakeven calculation is fairly simple. Calculate the difference in your current monthly payment for principal and interest and your new payment. Divide the result into the expected cost to refinance to determine the number of months to breakeven. For example, if you save $100 per month and our cost is $2000, the breakeven period is 20 months. If you plan to remain in your home more than 20 months, then you should consider refinancing. Keep in mind that some of the savings are the result of lengthening your term back to 30 years.

Many people who refinance are seeking to reduce their interest rate and shorten the remaining term rather than to reduce their monthly payment. If you are 5 years into a 30 year mortgage, you may be able to refinance into a 20 year term with a monthly payment that is close to your current payment. If your monthly payment is $1200 for principal and interest and you reduce your term by 5 years, your savings is $72,000 over the life of the loan.

If you have an Adjustable Rate Mortgage and are paying the initial rate, you should estimate what your new payment will be after the first adjustment. In most cases, this will be 1 ½ to 2% above the initial rate. If you have a very good rate and many years before the first adjustment, the decision is not an easy one.

If you have been paying PMI on your mortgage and your equity is now at least 20% of the current value of your home, you will save the cost of PMI as well.

Some lenders offer what is called a "No Cost" refinance. To get information on these loans or if you have questions about anything regarding mortgage financing, fill in our Mortgage-Finder Form and we will have a professional mortgage expert contact you. There is no charge for this service.