Last winter, Kris and I refinanced our mortgage. Interest rates had dropped, and it seemed like a good idea to make the leap. Though it took us a couple of months to actually pull the trigger, we finally ended up cutting the interest rate on our loan from 6.25% to 4.96%. According to sites like ShopRate and HSH.com, mortgage rates are still low, with loans available in the low- to mid- four percent range.

While doing research for Chapter 10 of Your Money: The Missing Manual (”House and Home”) over the past couple of weeks, I’ve looked up a lot of info about refinancing mortgages. Ultimately, I had to cut most of this material (replacing it with a single paragraph).

Rather than let what I learned go to waste, I thought I’d share the basics here at GRS. Much of this came from Tim Manni of HSH.com. (Manni is the author of HSH’s daily blog which concentrates on the latest developments in the mortgage and housing markets.)

Manni says that the obvious reason people refinance is to save money. They want to lower their interest rates. That said, people do refinance for other reasons, including:

  • Changing mortgage types (from an adjustable rate to fixed rate, for example)
  • Consolidating debt (which isn’t always the best move)
  • Tapping home equity (while avoiding a second mortgage)

Manni says that the old rule-of-thumb was to refinance when mortgage rates had dropped 2% below your current loan. “But waiting around for mortgage rates to drop two percent can wind up costing you time and money in the long run,” says Manni. “For some homeowners, refinancing to a new interest rate as little as half a percentage point less than your current rate could be enough for substantial savings.”

How can you tell if refinancing makes sense for your situation? Easy. Crunch the numbers. HSH.com and U.S. News & World Report have a refinance calculator, for example, that lets you calculate your change in payment, and shows you how long it will take to recover any costs associated with refinancing your mortgage. (There are dozens of other refinance calculators out there that will provide the same basic info.)

Manni says that it’s important to understand the costs involved in refinancing your mortgage. “The more it costs you to get your new loan, the longer it will take to recoup those costs. It’s important to have your refinance work to your advantage.”

Closing costs for a refinance are about the same as for a normal mortgage, or can even be higher if you don’t have much home equity. If your goal is refinance to a lower interest rate, HSH.com’s Vice President Keith Gumbinger says, “It’s generally best to refinance when the savings from your lowered mortgage rate will allow you to recoup the price of closing costs in 24 months or less.”

When Kris and I refinanced in March, for example, we calculated that making the scheduled payments, we’d repay the closing costs in less than a year. (But because we paid more than the scheduled amount, the closing costs have long since been recovered.)

As with all mortgages, be sure to read the paperwork if you refinance. I know it seems insane to read 100+ pages of legalese, but if you don’t read what you’re signing, you have nobody to blame but yourself if something goes wrong.

I’m curious: How many homeowners out there have refinanced this past year? Have you considered it? Why did you choose (or not choose) to refinance your mortgage? Do you think you might refinance soon? And how many people are worried about a possible rise in interest rates?

For a more in-depth look at refinancing, check out the HSH.com article “Refinance: Is It Right for You?” You also can see different lenders’ lowest mortgage rates or request mortgage quotes from reputable lenders at this site.

This article is about Choices, House and Home  Tuesday, 29th December 2009 (by J.D. Roth)