Knowing the answer to this question is no simple thing; anyone with a mortgage has some soul searching to do when deciding whether or not to refinance the loan. This is not easy question to answer and brings up another question: When should you refinance the mortgage?
The rule of thumb as to whether or not you should is if the prevailing interest rate is at least 2% lower than what you are paying now, you could save money by refinancing. There are costs associated with refinancing your mortgage so you need to recoup those expenses to come out ahead.
You should also take into consideration how long you will stay in your home. It takes nearly four years to benefit from the savings associated with refinancing your mortgage. If you are moving soon you may not want to refinance the mortgage unless there is some compelling reason to do so. There are other compelling reasons to refinance your mortgage. You can use a “cash out” mortgage refinance to pull equity out of your home for improvements or other expenses. You may have a risky option or interest only mortgage and would like to refinance to a safer fixed interest rate mortgage.
If you are a homeowner wanting to build equity in your home at a faster rate, refinancing to a mortgage with a shorter term is your answer. Your monthly payment will go up; however you will pay more to the principal loan balance and less to interest each month. This is important if you plan on using the equity in your home later on for things like paying for a child’s college tuition.