"Ask The Expert": My Broker Wants Me to Refinance - Is It a Good Deal for Me, or Just My Broker?

A reader says her mortgage broker is urging her to refinance her mortgage. She wants to know if it's a smart financial move for her, or if her broker is just looking for another commission.

Q: My broker is urging me to refinance my mortgage. How can I tell if it’s a good deal for me, or if my broker just wants the commission?

A: Mortgage rates approached record-low territory last week, with the average rate on a 30-year fixed rate mortgage dropping to 4.90%, according to rate-tracking firm HSH Associates. Rates on hybrid 5/1 adjustable rate loans sank to 4.26%.

Refinancing your mortgage could lead to substantial savings if you haven’t owned the home long and you paid a significantly higher interest rate on your first loan. After three years, a homeowner with a $650,000 30-year fixed rate loan would save about $582 a month by refinancing from a 6.0% rate to 4.9% rate loan.

Figuring out whether it makes financial sense to refinance is easy. Ask your broker how much you’d pay in total closing costs so you can find out when you’ll “break even” — the point at which the savings from the lower interest rate has paid for the closing costs. There are many online calculators, like this one, that will crunch the numbers for you.

There are times, however, when refinancing just doesn’t make sense — even if your monthly payment might be lower. If you’ve already paid a significant chunk of your mortgage off, it’s likely the interest you’ll save from a refinance will be slim. If you end up having to sell the home within a few years, you may never recoup the closing costs.

And the last thing you want to do is refinance to another 30-year mortgage if you’re more than seven years into paying off the first one. Adding all those extra years of interest payments will offset any potential monthly savings. If this describes your current situation, consider refinancing to a 20-year or 15-year mortgage to take advantage of today’s rock-bottom rates without adding on years of additional interest payments.

Have a question about your finances? Write to editor Terri Cullen at tcullen@hcplive.com.