Why should I refinance and when does it pay to do so?

Refinancing can be worthwhile, but it does not make good financial sense for everyone. A general role of thumb is that refinancing becomes worth your while if the current interest rate on your mortgage is at least 2 percentage points higher than the prevailing market rate.

There are several reasons to refinance your home:

1. To lower the interest rate on your mortgage, reducing your monthly payments and overall cost;

2. To reduce the term or length of your loan, doing so can save you thousands of dollars in interest;

3. To provide a means of consolidating your debt;

4. To draw on the equity built up in the house to get cash for a major purchase or for children's education;

5. Have an adjustable-rate mortgage (ARM) and want a fixed-rate loan to have the certainty of knowing exactly what the mortgage payment will be for the life of the loan.

It is better to refinance if you can get an interest rate at least two percentage points lower than what you are currently paying. However, every situation is different. Some lenders are offering reduced fees or no points. Asking yourself a few questions may help you determine if you can save money:

1. How much can I lower my current monthly payment?

2. How much will I pay in refinancing costs?

3. How much will I still owe on the house?

4. How much am I currently paying each month?

5. How much did I initially pay for the house?

There are other considerations, too, such as how long you plan to stay in the house. Most sources say that it takes at least three years to realize fully the savings from a lower interest rate, given the costs of the refinancing. Itemize all the expenses of the refinance and estimate your new monthly payments. Answering these questions can help you to decide if you should refinance.

Talk with mortgage lenders, real estate agents, attorneys, and other advisors about lending practices, mortgage instruments, and your own interests before you commit to any specific loan.