Ever heard the old rule of thumb if you can drop your interest rate by two points then you should refinance?  Well, that has got some truth to it.  But there are other things to consider before you rush down to the bank. 

How long are you going to stay in your current home?  How much are you going to save each month?  How much will it cost to refinance? Those are the 3 big questions.

First, staying put: 

If you are planning to move anytime in the next 12 months, you probably won’t recover your refinance costs. It wouldn’t make sense to refinance if a move is in your near future.

Second, monthly savings: 

To determine your monthly savings you’ll need to do a little math.  To make it easy for you here’s a link. Yahoo! Real Estate home mortgage refinance calculator will help you determine when you will break even on a refinance.  Here’s an example.  Take a $200,000 mortgage at 7.5% interest with a 360 month term.  Your monthly payment would be $1,398.  The total interest you’d pay over the life of the loan would equal $303,434.  If you decided to refinance at an interest rate of 6%, your payment would drop to $1,199.  Saving you about $199 per month.  The total interest you pay over the life of the loan drops to $231,676.

Third: the cost:

Mortgage fees are going to vary.  View several lenders fees at Bankrate.com.  Our example above has a 1% origination fee and $2,500 in other fees and taxes.  For a total of $4,500 in refinance fees.  With a mortgage savings of just under $200 per month it would take you 23 months of payments on your new mortgage before you start saving money.  (Almost 2 full years.)  That was with a 1.5% rate drop. 

How much can you save?

Yahoo! Real Estate has a great article on refinancing basics.  Good charts for easy reading.  Times like now when rates have dropped to lows that haven’t been seen for more than two years present opportunities for some homeowners to refinance and come out as big winners.  If you are paying more than 7% on your mortgage and plan to stay in your home for at least two more years you might want to talk with your lender.  Do it soon.  No one expects mortgage rates to stay this low for long.  Rates ended their five week drop according to CNNmoney.com.

So if you are thinking about whether you should refinance your mortgage just remember that old rule of thumb -the 2% rule- does have some truth to it.