We're thinking of refinancing our mortgage. Is there a general rule of thumb for how much lower the rate should be?
One often-heard guideline is that you shouldn't refinance unless your rate drops by at least one percentage point. But refinancing is complicated, so also consider:
What will it cost?
Refinancing can be expensive. Be sure to get a line-by-line breakdown of the closing costs from potential lenders, and keep in mind that some (processing fees, application fees, and title insurance, for example) are more negotiable than others. Just ask! Use a calculator like the one at Bankrate.com to add up all the expenses, and make sure you don't have to pay a discount fee, or "point," to obtain the stated interest rate; that can jack up your closing costs.
Is it worth the price?
If your goal is to save money, it usually helps if you're planning to stay in your home for a few years. For example, if you pay $2,500 to refinance and it saves you $125 per month, it would take you 20 months to recoup what you spent. And if you want a different loan term, consider whether you will be able to make the new payments, now and down the road. And if your primary goal is to obtain cash, a home equity loan or a line of credit is much cheaper.
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