Some people never think about their mortgage after getting it, except to write a monthly check and claim the tax deductions. Others watch the mortgage interest rates like hawks and refinance every time rates dip. The safest course is somewhere in the middle.
Done wisely, refinancing can be one of those, “Whoa, I just earned tens of thousands of dollars for a few hours of work!” tasks. But done blindly—without paying attention to the fact that every new mortgage costs upfront fees and possibly points, and stretches your loan back to a full 30 (or however many) years of interest payments—refinancing can actually cause you to lose money.
You might have heard an old rule of thumb that, for fixed-rate mortgages, the time is right when interest rates have dropped by two percentage points since you got the loan (for example, from 7% to 5%). But that theory dates from a time when closing costs were consistently higher than they are now and thus tended to undo the benefits of refinancing. So you’d be wise to run the numbers, as described below, even if the interest rate drop is as low as 0.5%.
Another good time to refinance is if you are tired of the fluctuations in your adjustable-rate mortgage and want to switch to either another ARM with better terms or to a fixed-rate mortgage.
In any case, you will need to take two important steps before deciding whether to refinance:
As with your original mortgage, you should shop around, checking in with both with your current mortgage company and by comparing rates online and with local lenders. A good mortgage broker can help, too.
Although refinancing can save you thousands of dollars over the life of your loan, transaction costs can significantly reduce these savings. You’ll recognize many of them, such as title insurance and escrow fees, lender service fees, points (if you choose to pay them in return for a reduced interest rate), appraisal fees, credit reporting fees, and so on. Why do you have to pay them all over again?