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When should I refinance my home?


One way to determine whether you’ll come out ahead is to figure your monthly payments based on the interest rate of your present mortgage and the one on the loan you’re considering (all it takes is a few clicks and keystrokes; Google “loan calculator” and pick a site). Just make sure you’re comparing like with like. The loan periods should be the same, and when doing the math the amount of the new loan should be raised to reflect any points or other costs involved in arranging it.
Here’s an example: Say you owe $200,000 on your home at 6.75 percent and you’ve got the chance to refi at 6 percent a year for 10 years, with total costs of 2 percentage points. A $200,000, 6.75 percent, 10-year loan – an approximation of your current mortgage – has a monthly payment of $2,296.48. That would drop to $2,264.82 on a 6 percent, 10-year loan of $204,000 (to take account of the costs).
Should you do the refi? Probably not. The $32 monthly savings just barely seem worth the time spent on the paperwork, and then only if there are no onerous conditions attached to the new loan, such as a prepayment penalty. More important, you would miss out on the opportunity to get an even better deal if rates keep going lower, while your existing mortgage protects you if rates go back up. A 5 percent loan, for instance, would carry monthly payments of just $2,163.74, saving you a further $101 a month, while your maximum exposure is the $32-a-month savings you would forfeit by keeping the existing loan.

When you factor in the costs in money and time of arranging a new mortgage, it’s probably not worth refinancing unless the rate is at least 1 percentage point lower on a loan of 20 years or more and perhaps 1.25 or 1.5 percentage points on a 10-year loan.

-Conrad de Aenlle