When deciding if it is worth refinancing your mortgage, you need to consider more than attractive interest rates. You should also consider the amount of closing costs involved (typically around 2 percent of the total loan amount) and whether the potential monthly savings will justify the costs of refinancing. Refinancing involves restructuring your current mortgage. If your credit is strong and you take the time to compare lenders, you could end up with sizable savings.
Closing Costs
Consider, for example, refinancing your mortgage for a total loan amount of $220,000, with closing costs of 2 to 3 percent (which could be as high as 5 percent if your credit is less than stellar). At 2 percent, the closing costs will be $4,400, but if you are saving $250 a month, it will take just under a year and a half to recoup the cost of refinancing. In this case, it is worth refinancing your mortgage as long as you are not planning to sell the house within a year or less.
Loan Terms
It may be worth refinancing your mortgage if you need to lower your monthly payments to avoid foreclosure. If you have 23 years left on your loan and you refinance for a 30-year loan term, you can dramatically reduce the monthly payment amount and have more time to repay the loan, especially with a 1 to 2 percent drop in your interest rate. However, you will likely end up paying more over the life of the loan, particularly if you have already been paying on your current mortgage for a long time or if you get an interest rate with less than a 1 percent difference from your current rate.
Subprime Loans
Subprime loans are often given to borrowers with poor credit histories at a rate of interest that is higher than the prime rate --- the lowest rate offered to preferred borrowers. If you could qualify only for a subprime loan when you obtained your original mortgage and you have stayed current with your payments, your credit rating may have improved enough to qualify for a better interest rate. In this case, it is definitely worth refinancing your mortgage as long as you can afford the new monthly payments and all the associated costs of refinancing.
Debt Consolidation
When deciding whether it is worth refinancing your mortgage, consider what you hope to achieve with a refinance. For many homeowners, debt consolidation is the foremost goal of refinancing. Combining a first and second mortgage or home equity line of credit, along with any student loans or credit card debt, into one lower, fixed-rate mortgage will mean a single monthly payment and potentially save you thousands of dollars in credit card interest.
Considerations
It is worth refinancing your mortgage if you can cut your interest rate by at least one point, according to CNN Money. Most of the time, a refinancing is worth it only if you will be in your home long enough to recoup the closing costs. Also, before deciding to refinance, make sure you know whether your current loan has a prepayment penalty.
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