If you’re dazzled by the current home mortgage interest rates and dream of reducing your monthly mortgage payments or want to replace an adjustable interest rate with a fixed rate, this might be the time to do it. Some of the primary reasons for refinancing are to lower monthly payments, pay off a loan or build equity faster, convert an adjustable-rate mortgage (ARM) into a fixed-rate mortgage, or change loan terms.

If you can refinance with a no-cost loan at a lower interest—meaning you pay no points or closing costs, and the interest rate is actually lower than your current rate—it might be worth your while to seriously consider refinancing. However, this scenario rarely applies.

Questions to ask
Just because interest rates might drop 1 or 2 percent lower than your existing mortgage interest rate doesn’t necessarily mean that you should refinance immediately. In matters of real estate and home mortgages there’s rarely a quick and easy formula, but by answering the following questions you might be able to understand whether refinancing is a good option for you.

1. How long do you plan to stay in your house? The most important question to answer is, will you be in your home long enough to reap the benefits of refinancing despite its costs? If you plan to be in your home for three years or less, you probably have little or nothing to gain by refinancing, because your month-to-month savings will never add up to the costs that are involved in a refinancing. However, if you know you’ll be in your current home four years or more, refinancing could be a wise choice.
   
2. What will a refinance cost you in points, transaction fees, and other closing costs? When you refinance a home mortgage, you usually pay off your original mortgage and acquire a new loan. With the new loan, you pay again most of the same costs you paid to get your original mortgage. The total expense for refinancing a mortgage depends on the interest rate, the number of points (a point equals 1 percent of the loan amount), and the other refinancing fees and closing costs. If you pay these costs up front, you will usually get a lower interest rate. Generally, savings of 2 to 3 percentage points below your current rate would be reason for refinancing considerations. However, even a smaller rate cut can pay off, if you can find a mortgage company willing to waive refinancing and closing fees. This could save you up to $5,000. Of course, in exchange for low or no up-front refinancing or closing costs, you’ll likely have to be willing to accept a rate that is higher than the prevailing lowest rate and be willing to pay more points (sometimes up to six points or more). To obtain the lowest interest rate offered, most mortgage companies will charge several points, amounting to several thousand dollars. Some companies may offer zero points at a higher interest rate, so your monthly payments will be somewhat higher. If you are considering a no-points loan, weigh carefully the additional interest and other fees that may be hidden in higher mortgage rates. In essence, in order to determine whether refinancing is wise, determine the dollar amount of interest you’d save through refinancing and compare that to the costs of refinancing. If you can easily reclaim these expenses through the savings in interest within two to four years, refinancing might be something that you would want to consider.
   
3. Do you have an ARM loan that you want to convert to a fixed-rate loan? The general feeling in the current real estate market is that interest rates are more likely to rise than to drop. Therefore, if you took out an ARM in the past two to five years, switching to a fixed-rate loan could reduce your monthly payments and the overall interest that you will have to pay throughout the life of the loan. There are certain cases when ARM loans make sense. If you are fairly certain you’ll be moving within five years, you probably will save money and avoid rising payments with an ARM.
   
4. How long have you held your current mortgage? If you’re on the back end of a fixed-rate loan—meaning you’ve already taken advantage of most of your tax-deductible interest—taking out a new loan could be beneficial, since you can deduct the interest and prorated points year by year.

Refinancing disadvantages

• Unlike a first mortgage, tax deductions for points are amortized over the life of the loan, not all together in the year you pay them.
  
• If your existing loan agreement includes a prepayment penalty clause, it could negate any refinancing benefits, since by refinancing you’re paying off your current loan to open a new one.
  
• The full 30-year term of your loan could begin anew from your refinance date.

Conclusion
In general, it may be worthwhile to refinance your mortgage if you can reduce your interest rate, if you plan to stay in the home for at least three to five more years, and if you can recover the refinancing charges in two to four years by means of lower monthly payments. Even if you do not meet all these guidelines, it may still be beneficial to refinance. Ask your bank to calculate how much you would save in total interest over the life of the loan by refinancing. Having this information could make your decision much easier.