Refinancing a home: Why or why not?

When interest rates drop, there’s often a surge in home refinancing. A low-interest-rate environment is bad for savers, but it can be great for those interested in refinancing a home — or buying one. The good news is that interest rates are still at low levels.

If you’re interested in refinancing a home, here are some tips and some things to consider.

Why you might want to refinance a home

First off, why should you consider refinancing a home? The obvious reason is that you can save money by securing a mortgage with a lower interest rate. Given the sums of typical mortgages, the overall savings can amount to tens of thousands of dollars, or even more. Remember, though, that refinancing a home involves getting a new mortgage to replace your existing one, and the interest rate is just one variable.

You can also change the terms of a loan — for example, turning a 30-year loan into a 15-year loan, or vice versa. A shorter loan life might demand higher monthly payments, but you’ll build equity and own your home sooner — and you’ll pay a lotless in interest. And if there’s enough of a difference in interest rates, you might snag lower monthly payments and a shorter term! (Meanwhile, if money is tight, you might want to stick with or switch to a 30-year loan.)

Refinancing a home can also mean switching from an adjustable-rate mortgage, or ARM, to a fixed-rate mortgage, or vice versa. An ARM can offer lower monthly payments, but if rates rise, so will those payments. Rates look like they will remain low in the near future, but they’re so low now that eventual increases are likely. Locking in prevailing low rates can be smart.

Debt consolidation is another possibility with refinancing, as you can combine your existing mortgage with a home equity loan in a single new loan.

Why you might not want to refinance your home

Refinancing a home is not always your best move, though. For instance, a rule of thumb is to only refinance if the prevailing rates are lower than your existing mortgage rate by 1 percentage point or more. Still, even that isn’t enough. Think about how long you expect to be in the home. If you plan to sell it and move within a few years, you probably won’t make up for the cost of the refinancing, as there are closing costs to factor in. You can do the math this way: If the total cost of refinancing amounts to $3,600 and you’re going to save $200 per month in payments, then your breakeven point is 18 months.

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