Once you have a mortgage, you’re set, right? Not really—though your parents might have kept the same mortgage for 30 years, today’s fluctuating mortgage rates keep you on your toes. So when should you refinance? If you can get a no-cost loan at a rate that’s lower than you are presently paying, why not refinance? Well, because it’s a pain in the you-know-what, that’s why.
How much would you need to save to make it worthwhile to refinance? It’s up to you, but most of us would be willing to settle for a clear 1 percent savings each year.
Assume the cost to refinance will average 1 percent of your loan amount (unless you choose a no-cost loan with higher interest rates) plus any points you pay. One important factor in deciding whether to refinance is how long you intend to keep your house. If you plan to keep your home just a year, it probably doesn’t make sense to refinance at all, no matter how much your interest rate will decline. But if you plan to keep your home for ten years or more, even a 1 percent reduction in interest rates makes sense for you.
Here’s a chart that you can use to decide whether it pays to refinance your mortgage.
| Number of years you will keep the house |
Minimum interest rate reduction |
| 2 | 2.5% |
| 4 | 1.75% |
| 6 | 1.5% |
| 8 | 1.25% |
| 10 | 1% |