It is a known fact that the mortgage refinance is the best way to save money on your monthly payments.  Nearly every home mortgage includes the right to repay the loan before the loan maturity date without penalty.  There is no good reason to accept a loan without such feature.

If you have taken out an ARM that permits you to "lock in" at a fixed rate, take advantage of that painless option.  If you have a conventional fixed-rate mortgage, you will need to run the numbers to find the point at which it makes sense to take out a new lower cost loan (refinance).  Remember that you generally have to pay a full set of closing costs, including application fee, appraisal, title insurance, attorney fees, and, depending on the loan prepaid points.

A savvy consumers will track interest rates, looking for the proper moment to refinance an existing mortgage at a lower monthly cost.  The old rule of thumb was that it made sense to refinance if interest rates have declined to at least two percentage points below what you're paying on your current loan.  Today, through the increased value of homes, some reduction in closing costs, and some new forms of mortgage loans, has narrowed the loan refinance spread.  In most situations, if rates have declined significantly, it makes sense to refinance an existing fixed-rate mortgage with a new, lower-cost fixed-rate loan.  If you have an ARM, it is usually a good idea to change over to a fixed rate mortgage at that time.

As you begin to consider refinancing, there is one important question to answer at the start:  How long do you expect to maintain ownership of the property?  If you expect to sell or refinance again within a few years, it is pretty unlikely that your saving on monthly payments in that period will make up for for the cost of closing  on a new loan.  However, in a typical refinance, somewhere around three to five years comes the break even point, and after that you are ahead of the game.

You can do you your own refinance analysis by using our mortgage calculator.  Start by gathering the following information for your current mortgage and any proposed replacement:

·   Principal.  For simplicity's, sake assume that the amount due under the new refinanced loan will be equal to the current balance on the current loan.

·     Interest Rate

·     Points and closing costs for the new refinance loan.  Determine the prepaid points and closing costs due under the new loan.  Any expenses already paid for the current mortgage are not relevant to the comparison.

·    Monthly Payments.  Again, for simplicity sake, compare the monthly payment just for principal and interest, leaving out a tax and insurance escrows since these costs should be unchanged in a refinanced loan.

Here is the formula:

1.  Subtract the new monthly payment from the current monthly payment to determine the monthly refinance loan savings.

2.  Divide the total due at closing by the monthly savings.

3.  The result is the number of month to break even.  Remember that this result doesn't take into account the loss of income on the closing costs or the tax write-off of points paid on the new mortgage.

It is worth noting that when you refinance a loan, you will be starting the amortization schedule from the top.  In the first 10 years or so of a mortgage loan, almost all of your monthly payment goes to paying interest costs.  The principal is reduced by only a small amount with each monthly payment.  If you've had your previous loan for a few  years, you have began to whittle away at the principal.  You will lose the progress with the new loan.