A. The best time to refinance a mortgage is when it's to your financial benefit by refinancing.
You may have have heard of the (2 percent rule) in mortgage refinancing. What this rule says is that you need an interest rate of at least 2 percent less than your current interest rate in order for refinancing to make sense. While this may be generally true there are times when it is not.
The way to determine whether or not a refinance makes sense for you is to look at the new monthly payment and the closing costs of the new loan. Let's say you have a mortgage of $225.000 at 7 percent but interest rates are now 6 percent. By refinancing at the lower rate you would save approximately $200 a month on your mortgage payment.
Now if your closing costs were $4000 for the new refinance loan it would take only 20 months to recover the costs of the closing. By taking the $200 a month in savings and multiplying it by 20 months you get a total of $4000. This is your break-even point. Once you reach the break-even point you really start getting into the gravy. Not only is your payment still $200 a month less but now you're cutting the total amount you pay back to the lender.
If you were to keep your home for 10 years it would equal $20.000 in savings. Take the $200 a month you're saving on your payment and multiply it by the remaining 100 months for a total of $20.000 in savings. That's not a bad deal!
Before making the decision to refinance, you want to be sure that the money you save by refinancing is more than the money it costs to close. When you're shopping for rate quotes be sure to get the percentage rate and the the costs for closing. Most mortgage lenders will be flexible in this area. Either you pay a little more in closing costs for a lower interest rate, or you pay less in closing costs in exchange for a slightly higher interest rate. It pays to shop around.
