Reader Question: Mortgage interest rates seem to be coming down, how do I know if it’s a good time to refinance?

Refinancing is a long-term numbers game. Many people refinance thinking that a lower mortgage payment means they’re saving money. It’s not necessarily true. To find out if this is a good time for you to refinance, let’s do some math! Let your math savvy spouse, friend, or child help you with this if needed:

1. Take the refinance principle and interest payment and subtract it from your current principle and interest payment. This would be your savings per month.
2. Assume that the closing costs of the refinance will be about 4% to 6% of the mortgage amount. Example: Closing costs would $10,000 on a $250,000 house if they charge 4%. Figure out your closing costs and write that down.
3. Take the number from step 1 (your monthly savings) and divide that into step 2 (your closing costs). This is the number of months it will take you to recoup your closing costs.

Now that you know how long it will take you to recoup your loss, you should decide whether you’re going to be living in the house that long. If you are sure that you will be there past the months it will take you to recoup the closing cost, then refinancing might be a good idea. If not, then don’t refinance.