I bought my house about two years ago, the interest rate is 5.25%. I'm seeing interest rates as low at 4.50% now. Is it worth refinancing my house this soon, or is it likely the fees will out-weigh or balance out the lower payment this soon? It's a 30 year mortgage.
In general, it is not the time since you refinanced that you should look at, but how long you need to stay in the house to recoup any costs associated with the loan. If I refinanced yesterday, but today I can refi at a lower rate with no costs, it will make sense to do it. If it will take 10 years to break even, it might not make sense.
Also, pay attention to what JoeTaxpayer said. Regularly refinancing into new 30 years loans is a sure way to never pay off your mortgage.
Another be wary of is doing cash-out refis. You are basically taking out any equity. This can be fine, if you are using the money wisely (home remodeling, education, etc). If you are just using it to payoff credit-cards which will just be charged up to the limit again, it is a sure way to get in trouble.
There are many variations of deals out there. I've seen "no point, no closing" as low as that 4.5% you cite. It's worth looking into this. For a pure no cost deal, even 1/8% benefits you. If there are costs, do the math.
But keep in mind. A proper comparison is to calculate the new mortgage with the current balance, new rate, but use the exact time remaining on current mortgage. You see, if I refinance $200K with only 10 years left, a 30 year mortgage will certainly have a lower payment, but it's extending the time. Using time left gives you the true monthly saving, and then you can see how many months till you break even to the closing costs.
1Refinancing at a longer term may actually make sense. You can continue making your old payment (or a slightly lower payment, based on the new interest rate) and pay it off a lot sooner, but during a financial emergency, you have the option of making the lower payment.– kindallJun 20, 2011 at 18:34
@kindall, absolutely right. There are so many different situations that can justify any path, so in my answer I focused on the one issue, how to first calculate "true break-even." From there, as you say, you don't have to make those payments as if on the old payoff. Jun 20, 2011 at 20:25
A factor I like to keep in mind is flexibility. If the costs are low (I had a $300 refi in summer 2010, and a $500 refi just finished), and you can recoup that money pretty quickly, the lower rate gives you flexibility. You can pay the difference toward principal, which means less interest over time. Or, you can have ability to do other things.
For $500, I went from 1580 to 1310/month, and am now renting the house out for 1500/month. So seemed like a no brainer.
EDIT: I should mention that it wasn't just the rate, but we paid down $40k towards principal since last refi. The much smaller balance gave me quite a diff, tho the rate only went from 5 3/8 to 4.95. If your balance has changed significantly, that can really lower monthly payment.