Check the current interest rate on your mortgage loan. Let’s assume you have a balance of $200,000, with monthly principal and interest payments of $1,013 at a rate of 4.5 percent.
Call two or three mortgage brokers and find out the interest rate you can get on a new loan. They’ll ask for your household income, the value of your house and the balance on your mortgage. If you don’t know how much your home is worth, contact your local property-tax office for an assessed value.
Ask the brokers to give you the interest rate and payments on a mortgage similar to the number of years left on your current loan. Also ask about a shorter-term loan, which usually has a lower interest rate.
When shopping for a new mortgage, you may be tempted to reduce your payments even more by lengthening the term of your new loan. While the benefit is more spending money per month, you can end up paying more in interest. I strongly suggest obtaining a new mortgage equal to or less than the number of years remaining on your current loan.
Then, get an estimate of all other costs, including title insurance, an appraisal and a closing fee. Lenders sometimes charge “points,” or origination fees, which are also part of your closing costs. One point equals 1 percent of the loan’s value. Mortgages described as “no-cost” or “zero points” do not carry this cost, but the interest rate may be higher.
Now, calculate how long it will take to recover your refinancing costs. Getting a new loan makes financial sense if you are able to break even soon.