Decision time: Refi right for you?

Don TaylorQuestionDear Dr. Don,
I was thinking about moving in the next two to three years. Is refinancing my house a good idea? I can get it 1 percent lower than my current rate, and there are no prepayment penalties with my current loan.
-- John Jump

AnswerDear John,
The shorter the time span, the harder it is to justify refinancing. That's in large part because you have to be in the house long enough to recoup the costs associated with refinancing. Be cautious in chasing down "low cost" or "no cost" refinancing. Often that means that the cost is baked into either the principal amount or the interest rate. The Bankrate feature, "Is no-closing-cost mortgage for you?," provides additional detail.

Bankrate's 2010 Closing Costs Study reported, "On average, the origination and third-party fees on a $200,000 purchase mortgage added up to $3,741 in this year's survey." Yours is a refinancing, so the costs may be lower than a new purchase mortgage.

You didn't give me numbers, so I made up a few of my own. You can use Bankrate's mortgage calculator to put together your own table:

Refinance option
Existing mortgageRefinancingDifference
Loan amount:$165,000.00$165,000.00
Interest rate:5 percent4 percent
Loan term (months):180180
Total interest (loan term):$69,865.71$54,687.31$15,178.40
Total interest, next two years:$15,767.92$12,567.81$3,200.11
Total interest, next three years:$23,050.34$18,337.29$4,713.05

Alternately you can try one of Bankrate's refinancing calculators. I like the mortgage refinance break-even calculator, because it looks at the break-even point for refinancing from four different points of view.

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