When Should You Refinance Your Mortgage

Q: I am just wondering if it would benefit us financially to refinance our mortgage. We have a 5.25 percent 30-year fixed-rate mortgage. We owe about $131,340. Our monthly payment is $1,218.

The house recently appraised at $185,000. I belong to a credit union, but haven’t checked their rates. We will be here the next two to eight years.

Do you think we could get below 4.25 percent anywhere and would it be worth refinancing if we could get that interest rate?

A: The key question to answer is how good is your credit? If your credit score is above 760, you may be able to get an interest rate that is quite good. Will it be 4.25 percent for a 15-year loan? That depends on where rates are the week you refinance.

Recently, mortgage interest rates fell temporarily to 4.25 percent for a 15-year fixed-rate loan and 4.75 percent for a 30-year fixed-rate loan. Unless you bought down the rate (which I wouldn’t advise), there is no chance you can down to 4.25 percent on a 30-year fixed-rate mortgage.

Interest rates stayed at these 50-year low levels for about two weeks, before climbing on positive economic news.

Let’s assume you and your spouse have an extremely high credit score (or high enough to qualify for the best rates). If you’re only going to be in the house for 2 years, it probably won’t pay to refinance unless you cut the length of your mortgage term to 15 years. Most lenders will charge you for certain costs when you refinance a loan, these cost can be around $2,000. If you sell within a couple of years, you might not recoup those refinance costs. If you take a higher rate instead of paying those costs, you might find that the difference in the rate you currently have and the new rate might be about the same.

Even if you can get a slightly lower rate, I’d suggest you just prepay your mortgage now to achieve the same sort of benefit of refinancing and obtaining a 15 year loan.

If you’re going to be in the house for eight years, and you can refinance to an interest rate of 4.5 percent or less (as of late December, 2009), paying very little in points and fees, you’ll only owe around $70,000 (or less) when you sell in eight years. Prepaying that much equity will help you save a boatload of interest on the loan.

Check out your credit union, but also a big box lender, a local bank that portfolios loans and a mortgage broker to get the best idea of where points, rates and fees stand. Right now, it really pays to shop around and compare points, fees and the interest rate being charged.

Learn more about when to refinance and interest rates.