Lower Interest Rates

• Reducing the total interest you will pay over time is a common and wise reason to refinance your mortgage. When you have an opportunity to get a lower interest rate, you need to weigh the potential savings against the costs of acquisition on the new loan. Even a fraction of a percentage of decrease in your interest rate can significantly lower the amount of interest you pay over the life of the loan repayment.
  
  

Other Goals

• Another common goal of refinancing is reduction of monthly mortgage payments. Some homeowners struggling to make monthly payments may actually refinance to a similar, or higher, rate to refinance to a longer repayment period. If you have paid off seven years on a 30-year mortgage, you can reduce your monthly payments by refinancing the principal to another 30-year loan. Cash-out refinancing is another common reason people refinance. This involves getting a new loan that is more than your existing balance and pocketing the difference to put toward home improvements or other projects. Additionally, some homeowners refinance to get out of an adjustable-rate mortgage and into a fixed loan, once the ARM rate increases.
  
  

Costs

• Refinancing is not free (usually). You typically pay similar closing costs to what you pay on a new mortgage. This includes various lender fees, titling, application fees, and others. In his Bankrate article "When to refinance your mortgage," Don Taylor indicates that average closing costs on a $200,000 loan were $3,118 in 2008. You must consider a refinance like an investment and weigh your potential costs, which a lender is required to estimate for you up front, against the potential financial gains.
  
  

Bottom Line

• Your bottom line decision should compare your break-even point for return of your investment against your anticipated timeframe for living in the home. For instance, if you assume the average closing costs of $3,118, and you expect to save $200 monthly in interest with a new mortgage, it would take you roughly 15 to 16 months to recoup the up-front costs in savings. This assumes no other considerations or unique factors. Additionally, it is generally advised that you plan for only one refinance so that you avoid multiple rounds of closing costs. Though interest rate movement is unpredictable, if only modest benefits are available at current rates, you might wait to see if a better rate develops in the near future.