Will I Save Money by Refinancing?

The purpose of most refinance loans is simply to save money. The goal is to minimize your expense over the life of the loan or to minimize your monthly payment in the near future.

If you can recuperate your costs within a year and have lower payments thereafter as a result of a lower interest rate, then refinancing probably makes sense for you. Keeping the closing costs and charges down is important with this type of refinance.

How Do I Know When It Is a Good Time to Refinance?

The old rule of thumb on refinancing held that the interest rate would need to decline by at least 2% for the refinancing to be worthwhile. A more accurate measurement would be to consider the savings in monthly payments, the costs of the loan transaction, and the term of the new loan compared to the old term. The key is to determine whether the benefits of payment savings and/or term reductions exceed the costs of the transaction.

This old rule of thumb was a simple way to analyze the refinance, allowing consumers to consider the rough costs of refinancing. That rule no longer holds true in today's market because you can refinance your mortgage with either no closing costs or no points.