Once you've bought a house or condo, every time you hear on the news that mortgage rates have gone down, you can't help but wonder if you should refinance your mortgage for a lower rate. But how do you know if a refi would be a good financial move for you?
Unfortunately, the only real way to figure out whether a refi will save you money is to crunch some numbers. For example:
Current mortgage - 5 years into a 30-year mortgage
Original Balance: $250,000
Current balance: $232,000
Current interest rate: 5.75%
Current monthly payment: $1459
Interest paid to date: $69,441
Interest that would be paid over life of the loan: $275,215
New 30-year mortgage
Balance including closing costs: $235,000
New interest rate: 4.75%
New monthly payment: $1226
Interest paid over the life of the loan: $206,313
Total interest paid on new loan plus interest paid on previous loan: $275,754
In this scenario, you would end up paying $539 more in interest because of the refi. But maybe you'd decide the different in the monthly payment would be worth it, because you'd have $233 more to spend each month.
Or, if you continued to pay $1459 each month on the new mortgage, you'd pay a total of $139,850 in interest for a total of $209,291 in interest paid. That's more than $69,000 less that you would have paid on the original mortgage. That would definitely make the refi worthwhile!
But there may be other factors to consider, particularly how long you plan to own the house. The scenario above assumes that you plan on keeping the house for 30 years. If you think you'll move in just a few years, the refi may not be worth the cost. In the example above, even if you continued paying the full $1459 each month, it would take six months to bring the mortgage balance back down to $232,000 - meaning that for those six months, you are simply paying off the $3000 you paid for the refi itself. That period of time could be longer if the refi costs more, or the change in the interest rate were smaller.
You can do the various calculations yourself by using an online mortgage calculator. For the scenario above, I used the Mortgage Calculator at Bankrate.com, but there are literally millions of calculators out there that you can use. To help figure out the different permutations, look for calculators that let you add extra to the monthly payment, and show you a full amortization table so you can see how much you've paid off each month during the loan period.
Of course, if you don't want to do the math yourself, you can call a reputable mortgage broker and ask them to run the numbers with you. Just don't let them pressure you into refinancing if it turns out you don't want to.