05/05/2014 06:10 pm ET Updated Jul 05, 2014

Refinance Wisdom: Should You or Shouldn't You?

Headline news reports that our very own Federal Reserve Board has finally put its foot down. "No more" is the message from the Fed. The Fed is putting a grinding halt to its purchases of bonds. Since this is one of the ways the Fed influences interest rates, you can expect interest rates to begin creeping up over time. Probably not a quick spike, but more of a slow and gentle rise in interest rates, including the interest rate you pay on your home mortgage.

This announcement is causing some financial pundits along with mortgage brokers to stand up and shout out that you better refinance now while you still can. Better get in while the getting is good in other words. While there may be some truth to their exhortations, the reality is a bit more muddled. Let's take a look.

The Big Question: Should You?

You may not want to hear this, but the reality is that it depends. Your situation is different than your neighbor's. So, to answer this question in a way that makes sense for you, the best thing to do is back up a step and start with some preliminary questions.

Where Are You?

Seriously, take a good hard look at you and your personal financial life. Start with your job or career. Are you in a relatively stable employment situation? Can you count on that income for the next five years or so? What about your spouse or life partner? You don't want to go through the hassle and expense of refinancing to suddenly find out your spouse has been transferred out of state.

Next, you want to ask yourself what is it you are looking for anyway? People refinance their mortgages for all sorts of reasons. For example, many look at refinancing as a way to decrease their interest expenses. Others find themselves needing to extend the mortgage over a longer period. Still others look to refinancing as a tool for debt consolidation. Whatever your motivation is, you want to be clear about your intentions. Once you are clear with your goals, then you can move on to figuring out if refinancing is the tool you need.

When a Refi Makes Sense

Refinancing your current mortgage can make sense for you, but you need to do at least a little bit of homework to make sure. In other words, pull out your calculator or head over to any of the many online refi calculators and plug in your numbers. You want to figure out what the payoff period is.

You see, refinancing isn't free, and there is a cost associated with refinancing your mortgage. The name for this expense is "closing cost." Your closing cost and the terms of your new loan will tell you how long it will take to break even and then move into actually saving money on your new, improved mortgage.

An Example

Take a look at this example. Suppose you have done all the preliminary homework. You have identified your goals and you know what you are looking for. You want to save money on the interest you pay. Tax deduction be damned, you say to yourself, I would rather pay less interest. So you approach the best lender you can find, and they refinance your $200,000 mortgage. You have about $52,000 in equity in the home so you feel comfortable signing the paperwork.

Suppose this lender's fees and all of the taxes and other fees associated with your finance worked out to be $3,854. If the new loan reduced the monthly payment by $162, you can see that it will take you almost two years of payments to break even. ($3,854 divided by $162 equals 23.8 months). In other words, you won't really begin to see real bottom line savings until the 25th month after the refinance.

Now that being said, that does not negate the value of refinancing at all. In fact, maybe the $162 reduction in your monthly payments gives you some more breathing room each month, especially with the rising costs of everything else. One way to be sure is to take a deeper look at the pros and cons of refinancing as seen here

The Bottom Line

The bottom line is there is no easy answer, there is no one size fits all solution. Refinancing your mortgage may be a good idea for you now. Then again, it may not. Take the time to do your homework before you take the plunge and fall for the latest marketing promotion. You'll be glad you did.

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