In addition to your mortgage rate and monthly payment, there are several factors that go into determining if it makes sense to refinance your mortgage including your current and new mortgage balance, how far you are into your current loan, the length of your new loan and your mortgage program (fixed rate, adjustable rate or interest only mortgage).
Without having all of the above information about your current and new mortgages it is challenging to make an informed recommendation but as a rule of thumb, when you refinance, your new lower mortgage payment should allow you to recover your closing costs, or breakeven, within 30 months of closing. For example, if your closing costs are $10,000 then your new mortgage payment should be approximately $333 less than your current mortgage payment so you can recover your closing costs within 30 months ($10,000 (closing costs) / $333 (monthly payment savings) = 30 months to breakeven). You can use our Mortgage Refinance Calculator to review your new mortgage payment, monthly savings and months to breakeven when you refinance.
Another factor to consider is how far you are into paying down your current mortgage and the length of your current and new mortgage. For example, if you are 10 years into a 30 year mortgage and you refinance into a new 30 year mortgage you have effectively extended your original 30 year loan into a 40 year loan because it now takes you 40 years to pay off your original loan. Extending the length of your mortgage usually results in you paying significantly more in total interest expense over the combined length of your original and new loans. So even if your new loan has a lower monthly payment you usually pay more in total interest expense over the long run by refinancing a 30 year mortgage with another 30 year mortgage. This is not always a bad thing if your first priority is lowering your monthly payment but total interest expense is something you should consider as well.
Another reason to refinance is to change your mortgage program. For example, borrowers with an adjustable rate or interest only mortgage may refinance into a fixed rate mortgage for greater certainty, especially if interest rates are increasing. In some cases it may make sense to refinance to change your mortgage program even if your interest rate or monthly payment increases.
As you can see, there are many reasons to refinance your mortgage and the decision to refinance comes down to the borrower's financial and personal goals. We provide a comprehensive overview of Reasons to Refinance Your Mortgage on FREEandCLEAR that you can use to help you decide if refinancing makes sense for you.
Finally, we always recommend that you shop multiple lenders to find the mortgage with the lowest rates and fees. You can review lenders in your area by clicking INTEREST RATES We advise you to contact at least four lenders as comparing proposals is the best way to save money on your mortgage.