Managing Mortgage Debt

There are two times when it makes sense to refinance your mortgage:

1. When interest rates are rising. If you have an adjustable rate mortgage, you should think about refinancing with a fixed-rate mortgage. You’ll avoid paying more interest as rates rise.

2. When interest rates are falling. Sometimes you can save money by refinancing at a lower interest rate.

Before you refinance, be sure to crunch the numbers. Say your total closing costs, including points, are $4,000.

Suppose you would save $100 a month on your mortgage payment by refinancing. However, your private mortgage insurance (PMI) will increase by $10 and you would lose $120 a year in tax savings by paying less interest: $10 a month.

In this example, your net monthly savings is $80: you pay $100 less per month in interest but you pay $10 more for PMI and you lose $10 a month in tax savings. If your upfront cost is $4,000 and you save $80 a month, it will take you 50 months to break even. Thus, refinancing on those terms makes sense if you expect to be in the house for more than 50 months.