Interest rates are at all-time lows, causing many people to consider refinancing their home loans to take advantage of the better interest rate and lower monthly payments. Individuals with high interest mortgages have been able to refinance their home with a lower interest rate and therefore lower their monthly payment by hundreds of dollars. Does it make sense for you to refinance your home? Here are a couple examples that might help you determine if refinancing is a good option for you:



Example One: The Browns have a 30 year fixed rate mortgage of $200,000 and an interest rate of 7%. They pay $1,330 per month currently. The Browns plan to live in this home for at least ten years.

They expect to be able to refinance their mortgage to a fixed rate of 5.2%. In this situation, they would save $232 per month, with a new mortgage payment of $1,098. The mortgage company said the closing costs would be $3,200. Is this a good deal?

It would take 14 months of saving $232 per month to recover the closing costs. Since the family intends to stay in the home for ten years, this refinance makes sense and will save the family quite a bit of money.

Example two: The Carltons also have a $200,000 mortgage with an interest rate of 6%. Their monthly payment is $1,199 a month. They could refinance their home loan to an interest rate of 5.4% on a 30 year term with closing costs of $3,800 and a new monthly payment amount of $1,123. They save $76 per month. This family would need 50 months of saving $76 to recoup their $3,800 closing costs. Since the family only plans on staying in the home for another 5 years or so – it doesn't make much sense to refinance in this situation.

Things to Consider Before Refinancing Your Home

Time: How long do you consider staying in the home after you refinance? If you only plan to live in this house for about five years, you're going to find it hard to make mathematical sense out of refinancing a home with closing costs. Justifying the closing costs typically requires that you're going to remain in the home for several years after refinancing, with monthly savings to compensate for the amount you pay in refinancing.

Savings: If your monthly savings after refinancing is minimal, you can probably find other areas of spending in your budget to to reduce expenses to the same amount. The benefit of finding other ways to save money is that you aren't required to pay closing fees in order to benefit from the savings.

Conclusion

Before jumping on the chance to refinance your mortgage, you really need to weigh the variables to determine whether you are really saving enough money for the effort. You should run the numbers on your own situation before you commit yourself to a re-finance.

Whether you choose to refinance or look for other ways to reduce spending in your budget like a balance transfer offer or cutting back on unnecessary expenses, use the savings to your benefit by paying down debts and building a savings account or retirement fund.