I’m well into paying off my mortgage. Should I still refinance?

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Amid an ocean of low interest rates, homeowners who are well into repaying their mortgages face a dilemma: Does it make sense to refinance when their balance is half or less than when they started?

“When rates drop, everyone’s knee-jerk reaction is ‘I have to refinance,’” said Kurt Johnson, a retail lending sales manager at Liberty Bank in Middletown, Connecticut. “That’s not always the right answer.”

Especially for people at the middle toward the end of their existing mortgage term, the costs and stress of refinancing could outweigh — and in some cases, actually negate — any potential savings.

Johnson said every person’s situation is unique, so if you’re considering a refinance, you should do your research, put pencil to paper, and make sure you understand if it’s really the best option for you. In other words, don’t let the lure of a low interest rate take your eyes off the prize: saving money on your mortgage costs.

Know your goals in a refinance

Is your goal to lower your payment or to save money?

Rocke Andrews, president of the National Association of Mortgage Brokers, said that’s the first question you need to consider if you’re thinking about refinancing.

For many people, he said, simply lowering the monthly payments is the main goal. People near the end of their original mortgage term are most likely to want to lower their payment if they are preparing to retire and anticipating a change in their income as a result. But, while lowering monthly payments can create some flexibility in your household budget, it doesn’t necessarily translate to long-term savings.

That’s because lower monthly payments are often the result of extending the term of the loan, which means paying more in interest in the long run.

There’s no question that someone halfway through a 30-year mortgage can refinance to another 30-year and have lower monthly payments, even if the interest rate stays the same. Combine the longer term with a lower rate, and the payment gets even smaller.

“The main thing you don’t want to do is extend it out solely for the purpose of getting a lower rate unless you like the advantage of getting a lower payment and you plan to do something with that extra money,” Andrews said.

Understand the full costs

Unfortunately, refinancing your mortgage isn’t free. The fees involved in taking out a new loan can wind up costing you thousands of dollars, usually 2 percent to as much as 6 percent of the mortgage amount. You may not have to pay all that money up front, but even if the costs are rolled into your new loan, you’ll have to shell out for them eventually, plus interest.

“We see scenarios over and over again where, on the surface, you think ‘wow this is too good to be true,’ the interest rate is 2 percent or 2.25 percent,” Johnson said. “These deals, so to speak, are front-loaded with costs either by way of high origination fees or points.”

He also noted that if you’ve refinanced a few times before, you may have a bigger balance on your loan than you realize, and refinancing again with costs rolled in will grow the amount you owe.

“Proceed carefully and always get a loan estimate and make sure that you understand it,” he said. “And if you don’t understand it, it never hurts to engage another party to help you understand it.”

Figure out when you’ll break even

“What you want to do is look at what you can save per month and how much it’s going to cost you and what your breakeven period is,” Andrews said.

The breakeven period is how long it will take you to pay off the costs of closing on a new mortgage and start realizing the savings from a lower rate and lower monthly payments. Andrews said for most people, it’s only worthwhile to refinance if your breakeven period is two years or less.

Johnson agreed that keeping the breakeven period in mind is crucial to figuring out if it’s worth refinancing.

To help simplify that calculation, Johnson said he usually recommends maintaining your repayment period when refinancing.

“If a person has 10 years left, I’d try to encourage them to refinance into a 10-year mortgage, not a 15, 20 or 30,” he said. “Once you factor closing costs into the equation, the breakeven sometimes isn’t even there.”

When refinancing will cost you more in the long-run, it’s only worth it if you need the budget flexibility that lower monthly payments can help you achieve. Otherwise, saddling yourself for decades more of mortgage payments may not be beneficial.

Do your research

“The biggest thing, it’s so easy to shop around, you definitely should and you also want to be comfortable and trust whoever it is you end up working with,” Johnson said.

Andrews agreed with Johnson.

“The best way is to check with a mortgage professional,” he said. “If you’ve gotten a mortgage recently and you can lower your interest rate by point 75 or 1 percent, then it’s usually worth it.”

Bottom line

Now is a great time to consider refinancing your mortgage, but before you go through with applying, it’s important to figure out what you’re hoping to achieve by getting a new loan. Low interest rates make the prospect attractive, but that doesn’t mean getting a new mortgage is the right step for everyone.

“Customers we run into are sort of on autopilot. All they see is the interest rate,” Johnson said.

Beyond the interest rate, you need to get a handle on how much securing a new loan will cost, and if you’ll ever get that money back in savings.

Even if you are going to save a little bit of money, Andrews said, it’s important to weigh the non-monetary costs, too.

“Refinancing is not the most pleasant thing you’ll go through, but if you’re going to save a bunch of money then it’s worth it.”

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