When to Refinance, When to Sit Tight

Think About the Long Term, Too

If you're planning to stay put for a while, then you need to take the long-term cost of refinancing into account, too. So be aware that refinancing with a mortgage whose term is much longer than what you've got left on your existing mortgage will cost you.

If you take out a new 30-year loan to replace the 15 years left on your existing mortgage, you'll significantly increase the number of payments you have to make on the loan -- instead of paying off your home over 30 years, you'll end up paying for it for 45 years. Even if your monthly payments are lower, you'll pay considerably more in the long term.

Say you've got 15 years left on a $200,000 mortgage you took out at 8%. Your monthly payments are $1,450, and you've got $153,000 in principal remaining. If you refinance the principal at 6% for 30 years, your monthly payments will drop to just $910 -- a savings of $540 a month. However, you'll tack on an additional 15 years of payments, so the new loan will cost a total of $327,600 over the full term. That amounts to a whopping $66,600 more in interest than if you had just finished out the remaining years on your original loan.

To avoid paying this extra interest, try to match the term of your new mortgage to the remaining years on your old mortgage. Instead of a 30-year loan in the example above, a new 15-year loan at 6% would drop monthly payments to $1,285. That's a savings of $165 a month. What's more, you would pay $30,000 less in interest over the remainder of your loan than if you'd stuck with your original mortgage. Assuming closing costs of about $4,000 and no prepayment penalties, your break-even point would be just 24 months away.

So whether you're stuck in an ARM and want out or you are hoping to take advantage of lower rates to reduce your monthly payments, make sure you crunch the numbers. If you do your homework, you may find the silver lining in an otherwise messy mortgage situation.

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