Rates are low. Should you refinance your mortgage?

A lot of people ask this question and then wonder about the so-called "rules of thumb." Aren't you supposed to wait until rates get at least 2 percent below your current rate? Or wait two years? Or perhaps you're supposed to recover your closing costs in two years?

There sure seem to be a lot of "rules of thumb" when it comes to refinancing! Guess what? Forget the rules.

Refinancing a mortgage means replacing your current mortgage with another one to reduce monthly payments, get a shorter loan term, or to combine two loans into one. Whatever the reason, pay less attention to the "rules of thumb" and more attention to the real issue: Is refinancing worthwhile for you?

For instance, instead of asking whether a rate will be lowered by 2 percent, 1 percent or some other figure, look at your dollar savings.

For instance, how many months will it take to recover the cost of a new mortgage? If your savings are $150 per month and your closing costs add up to $1,650 then it will take 11 months to recoup your costs. That's about it. If you expect to stay in the house for a year or more, refinancing in this example makes sense.

But what about the "rules?" Why should you wait until rates fall to a certain level if you can lock in a better deal now? Why wait months or years when you can come out ahead now? Besides, it may be that in the future rates will rise and the interest terms available today will be long gone.

On the flip side, if you refinanced and saved $150 per month but immediately got transferred and had to sell your home, the fact is that you would never recover those closing costs, much less enjoy lower payments on that house.

So if the question is whether or not to refinance, the answer really looks like this: It makes sense to refinance if you will have the new mortgage long enough to recover your closing costs.

How long is reasonable? The answer relates to such matters as how much refinancing costs up front, how much you save each month, and how long you expect to own the property.

You may also want to consider a loan where the cash cost to refinance is reduced or eliminated.

Many times such loans make a lot of sense. To see if a loan with little or no closing costs is good for you, look at the new monthly payment. Is it smaller than your current payment? What about the loan amount? Is it larger or smaller than what you now owe?

Note there is no such thing as a "No Closing Cost" or "Zero Closing Cost" loan. In fact, some states ban the use of such terms by lenders, and with good reason: There are closing costs! Instead of paying them at closing, they're buried in a somewhat higher rate or a larger loan balance.

For instance, instead of paying $2,000 in such closing expenses as an appraisal, title insurance or origination fees, your lender pays these expenses. How does the lender recoup its money? By charging you more interest and by lending you more money.

Some borrowers may also find that refinancing to a shorter term makes more sense that a lower payment. On a $100,000 mortgage with an 8.5% 30-year fixed rate, the payment is $768.91 per month. Over the life of that loan, you'd pay $176,808 in interest. Let's say today you could get a 15-year fixed refinance rate at 6.25%. The payment would be just over $857.42 every month. Even though the monthly payment is larger for the 15-year loan, over the life of the mortgage the shorter mortgage could save you about $122,000 when compared with the 30-year loan at the higher rate.

Should you wait to refinance even though your current mortgage is only a few years old? There may not be a clear-cut answer. But if your situation shows that you can save money without paying substantial long-term interest, then refinancing may be worthwhile, regardless of what the traditional "rules of thumb" might say.