To Refinance or Not

Question of the week: With mortgage rates low, I'm thinking about refinancing. But I've heard that you have to reduce your interest rate by at least two points to make it worthwhile to refinance. Is that true?—Kim T.

Dear Kim,

These days, few things about mortgages are simple enough to be captured in any rule of thumb. Whether to refinance or not involves several things: How long do you plan to stay in your house? What's the length of time and interest rate on the new loan? How much will you pay in up-front costs? It all boils down to this: Will the savings from refinancing outweigh the cost of paying off your old mortgage and starting a new one?

It can be complicated. Fortunately, there are dozens of online calculators that will do the math for you. Check out different rate, fee and payoff scenarios to make sure you're getting the best deal. If your savings are greater than the up-front costs, refinancing can make sense.

Members of the Armchair Millionaire community have taken this trip before. Here's their advice on keeping your ventures into high finance as close to the ground as possible:

Check with your original lender first. "A lot of lenders have refinance programs for their own customers, so they require little or no documentation. Because my appraisal, income and credit information were already on file with my current lender, I didn't have to pay for these again."—James0111

Watch out for hidden penalties. "Be sure to check to make sure that your current mortgage doesn't have a pre-payment clause. Depending on how big it is, it could outweigh your savings from refinancing."—MariaH

If you decide to go for it, use my checklist to make refinancing as easy as possible.

The Armchair Millionaire Checklist for a Painless Refinance

• Get your paperwork in order. Have your most recent pay stubs, bank and investment statements and tax returns on hand.
• Be specific when shopping for the best rate. To be able to really compare two different loans, you have to know much more than just the rate. Also look at the term of the mortgage, discount points and the lock-up period.
• Understand the fees. These break out into three types: Lender fees (including charges for document preparation, underwriting and origination), third party fees (such as appraisal, title search and insurance, and credit report) and government fees (like recording taxes and other charges assessed by local or state agencies).
• Get a Good Faith Estimate of costs before committing to anything. Don't hesitate to question any fees that seem out of line. If a potential lender insists on sky-high fees, take your business elsewhere.

THE BOTTOM LINE: Interest rates are lower than they've been in a long time. Refinancing can save you thousands of dollars over the next few years. On the other hand, a bad deal can cost you more than you save. Do the math and you'll surely come out ahead no matter which path you choose.