There are many reasons to refinance. The best reason, of course, is that it will save you money. To determine how much, you have to consider the difference in the new interest rate compared to your current rate, the cost of the refinance, and how much time it will take to recoup that cost.

Example: You have a $100,000 mortgage balance with an interest rate of 8%. Your monthly payment on the loan is slightly under $735. If you refinanced to obtain a 7% loan, your payment would fall to slightly over $665. You will save $70 each month. Once you know the refinancing costs, it is easy to calculate how many months it will take to come out ahead. Just divide the monthly saving into the costs. Using easy numbers, if the refinance costs are $700, it would take you ten months to cover the costs. On the eleventh month, you would be ahead.

Unfortunately, it is not quite that simple. If you do not pay the refinancing costs out-of-pocket, your new loan will be $100,700. This will raise your monthly payment to $670. If you pay the costs out-of-pocket, you lose the interest you could receive on the $700 by putting it into a savings account. These are usually small amounts that will not affect the refinance calculations. However, if large amounts of money are involved, the importance of these factors increases greatly. If there is only a small savings by refinancing, you must consider all the costs and savings.