Over time, I have heard many explanations on what someone thinks is the benefit of refinancing their mortgage. Some examples are “it doesn’t make sense unless i get a rate 2% lower”, “I don’t care as long as the payment is less”, etc. The real key to a successful refinancing is actually knowing the cost vs the savings of your new loan.
When going from a 30yr mortgage to a new 30yr mortgage(15yr to 15yr, etc) you want to divide the cost of the new loan by your monthly savings. So let’s say on your $200k loan you have a rate of 5.5% and are going to refinance to a rate of 4.25%. Just based on the principle and interest part, you are saving $151 a month. Lets say that the closing cost on your loan is $3500, this would include the lender fees, title company fees, appraisal fee, etc. When you divide the closing costs by your savings, it would take you 23 months to recoup the cost of the new loan. Which is great. A general rule of thumb, is if you can recoup your costs within 36mths it is a good refinance. But, it really depends on your financial goals and how long you plan on living in the home.
Keep in mind, the above example is just a general estimate so you can get the concept. You also want to take in to account other benefits, such as: getting cash out of your loan, removing mortgage insurance, reducing the term of your loan,etc Reducing the term of your loan would include going from a 30yr mortgage to a 15yr mortgage. Or you could also look at doing the opposite and go from a 30yr mortgage to a 15yr.
Everyone has an idea of what the benefit of refinancing should be, but make sure when you are refinancing you are comparing the cost of your new loan vs the savings.