To Refinance or Not? That is the question.

When you refinance your mortgage, you usually pay off your original mortgage and sign a new loan. With a new loan, you again pay most of the same costs you paid to get your original mortgage.

These costs may include settlement costs, discount points, and other fees. You also may be charged a penalty for paying off your original loan early, although some states prohibit this.

The total expense for refinancing a mortgage depends on the interest rate, number of points, and other costs required to obtain a loan. To obtain the lowest rate offered, most mortgage companies will charge several points, and the total cost can run between three and six percent of the total amount you borrow.

For example, on a $100,000 mortgage, the company might charge you between $3,000 and $6,000. However, some companies may offer zero points at a higher interest rate, which may significantly reduce your initial costs, although your payments may be somewhat higher.

HOW TO DECIDE

Traditionally, the decision on whether or not to refinance has usually meant balancing the savings of a lower monthly payment against the costs of refinancing.

In recent years, companies have introduced "no cost" and low cost refinancing packages that minimize or completely eliminate the out-of-pocket expenses of refinancing. (These refinancing packages compensate with a higher interest rate, or by including some of the costs in the amount that is financed.)

For the refinancing to make sense, the interest rate for your new mortgage must be about 2 percentage points below the rate of your current mortgage. However, with the newer low and no cost refinancing programs, it can be worth your while to refinance to obtain a smaller reduction in interest rates.

An important factor to consider is how long you expect to stay in your home. If you plan to move in a few years, the month-to-month savings may never add up to the costs that are involved in a refinancing.

REFINANCE CONSIDERATIONS

Keep in mind several issues when you are making your decision:

1. First, even a small rate cut can pay off quickly. That’s because you can easily find mortgage companies willing to waive routine refinancing charges such as application, appraisal and legal fees (which can add up to $1,500 to $3,000). Of course, in exchange for low or no up front costs, you’ll have to be willing to accept a rate that’s somewhat higher than the prevailing rock bottom.

2. Second, if you are planning to stay in your home for at least three to five years, it may make sense to pay "points" (a point equals 1% of the loan amount) and closing costs to get the lowest available rate.

3. And third, you can avoid laying out cash and still get a low rate by adding the points and closing costs to your new mortgage. This does not necessarily mean you’ll be shouldering a lot of debt. If you’ve had your current mortgage for at least three years, you’ve probably reduced your balance. You may be able to tack your closing costs onto your new loan and still end up with a mortgage that’s smaller than your original loan -- plus, of course, a lower rate and lower monthly payment.

SHOULD YOU REFINANCE, OR NOT?

Remember your goals. If you can lower your interest rate by at least 2%, then it probably makes sense to refinance. If you really need some extra cash, then you should probably refinance regardless of the new interest rate.