How to Know if You Should Refinance Your Mortgage

Dear Dr. Don,

This would be my first time refinancing a mortgage, so I have some questions. I'm wondering whether I should go ahead with refinancing and whether a quoted rate was a good deal. The bank told me the rate could be as low as 3.625 percent for a 30-year fixed-rate loan. My current rate is 5.25 percent and monthly payment is $1,290. With the lower rate, the payment would be about $1,035 per month. The title, escrow and miscellaneous fees would cost about $2,000.

What do you think, Dr. Don? Should I refinance?

Thank you,

- Bradley

Dear Bradley,

You can get a sense of whether you got a competitive interest rate quote by comparing your loan's annual percentage rate calculation with the weekly Bankrate national average for 30-year fixed-rate loans, which is, at this writing, 3.6 percent, so your quote seems right on trend.

(Editor's note: Rates have since increased.)

The old benchmark for refinancing was to plan to be in the house long enough to recover closing costs through lower monthly mortgage payments. By that measure, it would take $2,000 divided by $255, equaling nearly eight months to recoup the investment.

That's not the best benchmark, however. What you're really trying to do in refinancing is to lower your total interest expense. Bankrate's refinance interest savings calculator will show you how much you can save over time.

The calculator gives a report of the difference in interest expense over time. Then, you can match it against your forecast of how long you plan to be in the house. It is unlikely you would be able to find a 30-year rate lower than 3.625 percent.

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