Refinance Information  >>  When to Refi

When Should I Refinance My Mortgage Loan?

by Brandon Cornett (© 2009)

What is the rule of thumb for refinancing a mortgage? When does it make sense? When should I refinance my mortgage in this economy?

These are all common questions among homeowners, especially when interest rates drop considerably like they did in 2009. Many of these same homeowners believe that there is some magic rule of thumb for refinancing, such as the often-quoted two percent rule. Well, you can take all of those rules of thumb and throw them into the trash.

"Okay, smarty, so how do I know when it's a good time for refinancing? When should I refinance my home mortgage loan?"

The answer to this question is simple. You should refinance when it mathematically makes sense to do so, and when it helps you achieve your desired goal. Some people use refinancing to secure a lower interest rate on their mortgage, thereby saving money. Others use it to eliminate other high-interest debts, such as credit cards. So your first step is to figure out what your financial goals are, and then determine whether or not refinancing will help you achieve those goals.

When to Refinance - A Rule of Thumb Revised

I mentioned the two-percent "rule of thumb" earlier. This is the most commonly offered advice on the subject of refinancing, but it is flawed advice. As the saying goes, you should only consider a refinance if you can lower your interest rate by two percent or more. People have been saying this for years, just because they read it somewhere or heard somebody else say it. Monkey see, monkey do. Forget this advice. This rule of thumb is far too general to be useful to you.

In truth, there are several factors to consider when deciding when you should refinance your mortgage loan. These factors include:

• How long you plan to stay in the house (and make payments on the new mortgage)
• How much lower the interest rate will be on the new loan, after refinancing
• How much you'll have to pay in closing costs and fees when you refinance
• Whether or not you plan to do a cash-out refinance

Once you have all of these pieces of the puzzle, you can plug the numbers into a refinancing calculator to see how much you might save. Based on these results, you'll know if it's a good time to get a refi. You can find plenty of these calculators online, on such websites as Bankrate.com, CNN Money and others.

Of course, you'll have to get some refinance quotes from lenders, in order to run the numbers through a calculator. The interest rate you get on the new loan is a key part of the equation, so you'll need to find out what kind of rate you can secure.

Here's the key to all of this mortgage math. In order for a refinance to make sense, the amount you save must exceed the amount you pay (in closing costs). Anything short of this mark, and you should not bother with it. This is often referred to as the break-even point, or BEP.

This article answers the common question, When should I refinance my home mortgage? To learn more about this topic, check out the related articles below:

• Average Cost to Refinance a Home
• How to Apply Online for Quotes and Rates

I hope this lesson helps you determine when it makes sense to pursue a refi loan, and I wish you well in your financial pursuits.