Mortgage refinancing applications jumped nearly 20 percent in a single week earlier this month, according to the Mortgage Bankers Association, and it's not hard to see why.
The average 30-year fixed rate has drifted down from its recent peak, and for the first time in a while, a meaningful number of homeowners are running the math on whether a do-over makes sense.
Here's the catch: the classic rule of thumb says you refinance when you can shave at least 1 percent off your rate.
That advice was written for a world where closing costs were small and rates moved in big, dramatic swings.
Start by pulling your current loan statement.
You need three numbers: your remaining balance, your current rate, and how many years are left on the loan.
Then ask a lender or two for a quote on the same balance with today's rate.
The difference in monthly payment is your gross savings — but it isn't what you actually pocket.
On a typical refinance, expect to pay somewhere between 2 percent and 6 percent of the loan amount.
On a $300,000 balance, that's $6,000 to $18,000.
Some of it can be rolled into the new loan, but that just means you're paying interest on it for years.
Divide your closing costs by your monthly savings to get your break-even point.
If you're saving $150 a month and paying $6,000 to close, you need 40 months — a little over three years — just to get back to zero.
If there's a decent chance you'll sell or refinance again before then, the deal probably isn't worth it.
There's another trap worth naming: resetting the clock.
Going from 22 years remaining back to a fresh 30-year term lowers your payment, but it can also mean paying far more total interest over the life of the loan.
A lower payment is not automatically a better loan.
Two other things to check before you commit.
First, whether your current loan has a prepayment penalty — most don't, but some do.
Second, whether your lender offers a "streamline" or IRRRL-type program if you have an FHA or VA loan.
Those often come with reduced paperwork and lower costs.
If you're sitting on a credit card balance at 22 percent, a cash-out refinance can look tempting.
You'd be trading unsecured debt for debt secured by your house.
If your income dips, the consequences are much worse than a collections call.
Also worth knowing: a refinance won't fix a credit score problem.
If your score has dropped since you bought the house, you may not qualify for the best advertised rates at all.
Check your score for free before you start shopping, and get quotes from at least three lenders — the difference between the best and worst offer on the same day is often a quarter point or more. **Our take:** Refinancing is a math problem, not a mood.
If your break-even is under two years and you plan to stay put, it's worth a serious look.
Final Thoughts
If it's four or five, you're mostly buying a lower payment with money you'll never see again.