Why refinance? The lower the rate, the less it costs you for the money that you borrow. As a general rule, if the interest rate is two points lower than what you are currently paying, it's time to refinance. However, something to consider is the length of time that you plan to own your residence. You want to be certain that the cost to refinance will be recovered over the remaining term of the loan; that is, not the number of years left on your current mortgage loan, but the remaining number of years you intend to own the property.
Although your monthly savings may be substantial, you will incur some closing costs. Typically you can count on up to 2-3% of the new loan amount in closing fees in addition to title insurance. Your lender will estimate your closing costs for you. To justify refinancing, your closing costs must be recovered over the life of the new loan. By dividing the closing cost by the number of months you plan to own your home and add the result to the new monthly principal and interest payment you will determine if you "break even". If the resulting amount is less than your current mortgage payment, it is time to refinance.
You may also consider taking "cash-out" to payoff other debts or to invest. In this case you will need to determine that the cost to refinance is worthwhile in order to payoff those debts or invest in other markets. Consider not only the closing costs associated with refinancing, but the points you will pay for a lower rate and funds associated with paying off your existing loan. Ask your lender to compare your expenses for various loan programs. In most cases you will be eligible for differing loan programs so be sure to consider your options for your financial situation.
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