The Rule of Thumb

• The quick rule of thumb is if you can get a new mortgage for at least 2 percent less than your current mortgage, it will be worth the hassle of refinancing. Why such a large difference? There are closing fees and other costs you'll incur with refinancing. If those costs add up to more than your monthly savings, then it's not a good deal. Two percent is roughly the difference that you will need to cover those costs.
  
  

What It Will Cost You To Refinance

• Consider all of the costs you'll have with refinancing. Do you need to pay points (a percentage of the value of the house) to get the lower rate? Are there application fees, appraisal costs, attorney fees, origination fees, costs for a credit report or private mortgage insurance? These costs will vary from location to locations, but particularly from state to state. Add all these costs up. Your savings from refinancing should be greater than this cost. The lower these costs are, the faster you will be able to recover them through your monthly savings and begin truly paying less for your house.
  
  

What Are Your Net Savings?

• What is the difference between your current payment and your new payment? Take this amount and multiply it by your federal, state and local tax rates. If you are paying less in interest for your refinanced house, you will also have less of a tax deduction. It's a cost many people forget about. Subtract the tax amounts from the difference, and you will have your net monthly savings.
  
  

How Long Will It Take To Recover Your Costs?

• Now divide the total costs by your net savings. This will give you the total number of months needed to cover your refinancing costs before you begin to realize savings. It will also be the minimum amount of time you should wait before refinancing your home for a second time.
  
  

How Soon Are You Planning On Moving?

• Another factor to consider is how long you are planning to stay in the house. If you are planning on moving within three years, you probably won't be in the house long enough to recoup the savings from refinancing.
  
  

Consider Refinancing an ARM

• If your mortgage is an ARM (adjustable-rate mortgage), you will want to begin looking into refinancing your mortgage if interest rates look like they are going to rise. In this instance, it may be simply refinancing to lock in a fixed rate.