Refinancing your home is a big decision and is something that you should give a lot of thought before you act. It may or may not be the right move for you.

Michelle and I refinanced our home at the end of 2009. We had just bought the home the year before when the market started to drop. Part of me wishes that I would have had the foreknowledge to have waited just a little bit longer and gotten a better deal. But hey, hindsight is always 20/20 isn't it.

Our original mortgage had a rate of 5.5% which is still a great rate, but when rates dropped down around 4.25% for a while, I started thinking that it might be worth refinancing. I received tons of direct mail advertisements and letters from mortgage companies. It was a little annoying, but I one day I was feeling curious and decided to call and see if I could really save what they claimed.

Long story short, I ended up refinancing with the company I had called. Our rate went down another 1/2 a percentage point which is not a huge change, but this dropped our monthly bill from $1,253 to $1,225. Whooohooo! I hole $28 per month less!

Yea, I know what you might be thinking, "Was it really worth paying a couple thousand dollars in closing fees just to save $28 per month?"

Answer: We didn't pay the closing fees. At least not cash-out-of-pocket. We rolled the closing fees into the new loan. This added a couple thousand dollars to the top of the new loan, but with the lower interest rate, we will actually end up paying around $15,000 less than we would have with the old loan AND we save $28 per month to help with our immediate cash-flow. I believe they call this "streamlining." This method is only available with certain companies and with an FHA insured mortgage where there is a little bit of equity already built up in the home.

I will admit that I may have made a mistake by choosing to refinance with a company that I had only talked to on the phone. It ended up working out alright, but I look back (again, hindsight 20/20) and think that it would have been smarter to go back to my original loan officer who I have met with face to face several times and go over the numbers with him.

If you are thinking about refinancing, I highly recommend asking some friends and family if they know of any honest mortgage brokers. Don't go directly to the banks. Use an independent broker. They will be able to find a better product for you because they are not tied down to just one.

Ok, now the big question: Should you refinance NOW? (Date: April 12, 2010).

Here are some of the facts:

After March 31st, the government stopped buying mortgage-backed securities, which is good on one hand because it allowed many other independent investors to get back into the market, but bad on the other hand because it forced mortgage rates to rise to 5.21% on 30-year fixes which is the highest it has been in 8 months. This is still a great rate, but when you compare it to 4.25% a year ago, it's not awesome. Some "experts" expect the rates to continue to increase from this point on. But who really know, right?

First of all, sit down and ask yourself why you are looking to refinance. Is it for immediate savings, or is it for long term savings? If it is for immediate savings, then take into consideration how much the refinancing is going to cost you. If the closing costs are $1,500 and you are only saving $30 per month, then you will not get that money back for another 4 years. But, if your rate drops significantly and it saves you over $300 per month on your payments, you will be saving money after only five months. (Then again, the other option is to roll the closing costs into your loan like I did, but you should have a professional go over these numbers with you to determine if this is even possible.)

A rule of thumb that many people use is the 2% rule. If your rate can be lowered by 2%, then refinancing may be a great idea. Another thing to keep in mind is that it's probably a good idea to make sure you will be able to recoup the closing costs in 24 months or less because of the savings on your monthly payments.

Does refinancing to a lower interest rate always save money in the long run?

Answer: Depends

In many cases, yes, if the interest rate lowers, the amount of interest paid will be much lower in the long run as well, except if you have already made a lot of the payments.

Let's look at my own situation. Let's pretend that I had already made 180 payments on my mortgage (which would be 15 years). And let's say that I wanted to refinance from 5.5% to 5.0%. This would cost me about $58,000 in additional interest payments, because it's basically like starting over (Making a 30-year loan into a 45-year loan). But it would save me about $400 on my monthly payments which ends up being $145,800 in 30 years. I could then take that $405 and put it in my saving account, pay it towards my principle every year, invest it, or I could do a little of all three. In the end, I have saved money. That's the key.

I figured all these numbers out by using the Refinance Interest Savings calculator at DinkyTown.com. (They have a lot of great calculators to use for free. I highly recommend checking them out).

I honestly don't know when it's not a good idea to refinance except for the obvious one: When you can't get a lower rate!

My advice is to find an honest dependable mortgage broker, go over your numbers, and make a decision that meets you immediate and long-term needs. Refinancing your home is not something to be taken lightly. This is one of the BIG WINS in saving money. Be smart!

Are you looking to refinance? What are your concerns? What has been your experience in the past? Please share your comments below: