Once you know the break-even point for each loan you've been quoted, the main consideration is how long you expect to be in your present house. If you won't be there long enough to reach the break-even point, don't refinance.

If you think you'll be in your house past the break-even point, you still have to decide whether to take a loan that features a lower rate but more points upfront, or a higher rate with fewer points. The general rule is that if you don't plan to be there much past the break-even point, lean toward the lower transaction costs. That means a shorter stay equals fewer points with a higher rate; a longer stay equals more points but a lower rate.

To simplify things, some lenders now specialize in a "no points or closing costs" option. They let you skip the points and closing costs entirely in exchange for a slightly higher interest rate (this is sometimes called a "par quote" mortgage). Then it becomes simply a matter of comparing the rate they quote you with the rate you're paying now. For example, if you're paying 6.50% and can get a "no points or closing costs" rate of 6.00%, you're guaranteed to save. There's no reason you wouldn't want to refinance many times over the years when the advantages are this clear cut.

Sure, there's some paperwork involved, but there's probably nothing else you can do that will pay you (in saved interest) such a high hourly rate for your time! In fact, it's worth checking every few months and consider refinancing anytime you can save at least one-quarter of a percent on a "no points or closing costs" basis. Why? Depending on the overall level of rates, you'll save $6,000–$7,000 in interest over 30 years on a $100,000 mortgage for every one-quarter percent reduction in your rate.

Keep in mind, however, that the shorter the remaining term of your mortgage, the less you will save. If you have less than ten years remaining on a 30- year mortgage, it is unlikely that refinancing will result in much savings.

If you still have many years left on a 30-year loan and really want to save big, the best way is to replace it with a 15-year mortgage. The monthly payment will be higher, but the interest rate will be lower — and the long-term savings in interest will be dramatic. (One of the SMI staffers refinanced from a 30-year loan to a 15-year note earlier this year, and will enjoy an estimated interest savings of $90,000 over the life of the loan! Ben Franklin would be proud.)

Other things to keep in mind about refinancing:

• You can refinance with the original lender or go to a new one. It usually pays to compare offers from other lenders.
• Be sure to find out when the rate on your loan will be "locked in" (permanently set). Is it when you apply? When the loan is closed? Many borrowers have been hurt when interest rates rose after the original proposal was made but before the lender locked in the rate.
• Get a commitment in writing of the exact terms of the mortgage being offered and how long the offer is good for. It should include the circumstances under which the lender would be allowed to back out; for example, in case of a dispute over the appraised value of your home. Make sure the loan allows you to make additional principal payments (a "prepayment option") without any penalties.
• Check with your loan officer or processor to find out when the appraisal and credit agency reports are due back. Call on the expected dates to make sure they come back in good shape.

Posted January 14, 2008

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