If you purchased or last refinanced your home at a time when interest rates were much higher, you may have periodically considered refinancing to reduce your interest rate for the remainder of your loan. While shaving off several percentage points in interest can save you thousands or even tens of thousands of dollars over the term of your loan, there are costs associated with each refinance as well, and glossing over these when making your decision could ultimately cost you. Read on for some of the factors you'll want to consider when deciding whether to refinance to take advantage of today's low interest rates.
How long will you stay in the home?
Even mortgages that advertise "no closing costs" have some associated costs, and you'll want to factor these into your calculations to come to your "break-even" period--the month when you've saved enough in unpaid interest to fully cover your closing costs and any points paid. Depending on the amount of closing costs you're shouldering, this break-even period could be anywhere from a few months to a few years in the future, and if you're not sure whether you're going to stay in your home for much longer, paying to refinance may not be the best use of your money.
On the other hand, those who have every intent of staying in their current home until the mortgage is fully paid off shouldn't have to worry much about the break-even time period; unless the closing costs actually exceed the total amount in interest you'll be saving over the term of the loan, which is unlikely for all but the smallest low-interest loans, you're going to save money by refinancing.
How much longer will you be paying the mortgage?
If you've already put in a decade or more of payments on your current mortgage and are planning to reamortize the remaining payments over a full 30-year term, your monthly payment is likely to significantly decrease. However, this "found money" comes at a cost, and if you don't opt to prepay your mortgage, you could find yourself juggling this monthly mortgage payment well into your retirement years.
If you're happy with the progress you've been making toward paying your loan off, you may want to consider converting a 30-year loan with 20 years left into a 15-year loan to help you keep the same approximate repayment schedule while still reducing the interest rate.