Thinking about Refinancing?

If rates have dropped at least one full percentage point since you originally took out your loan, start to contemplate and assess refinancing. The key item to calculate is how many months it will take you to recoup the costs of refinancing (loan fees, title insurance, and the like). For example, suppose that your favorite mortgage lender tells you that you can whack $150 off your monthly payment by refinancing. First, you won't save yourself $150 per month just because your payment drops by that amount -- don't forget that you'll lose some tax write-offs if you have less mortgage interest to deduct.

To figure how much you will really reduce your mortgage cost on an after-tax basis, take your tax rate and decrease your monthly payment savings you expect from the refinance by that amount. If you're a moderate-income earner, odds are that you're in the 28 percent tax bracket. So if your mortgage payment would drop by $150, and if you were to reduce that $150 by 28 percent (to account for the lost tax savings), then (on an after-tax basis) your savings would actually be $108 per month.

Now $108 per month is nothing to sneeze at, but you still must consider how much refinancing the loan will cost you. If the refinancing costs total, for example, $6,000, it will take you about 56 months ($6,000 divided by $108) to recover those costs. If you plan on moving within five years, refinancing won't save you money -- it will actually cost you money. On the other hand, if it costs you just $3,000 to refinance, you can recover those costs within three years. If you expect to stay in your home for at least that long, refinancing is probably a good move.