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The Curious Bag
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<h4 class="dechead">On One Hand: When the Interest Rates Drop
According to Investopedia, the traditional rule of thumb states that you should refinance your home when the interest rate you can get on a refinance drops more than 2 percent below your current rate. Some lenders claim that you should refinance your mortgage if the rates fall by more than 1 percent.
On the Other: When You Can Afford the Closing Costs
When you refinance, closing costs can run between 3 and 6 percent of the loan. These costs must be paid up-front. If you do not have the extra cash lying around, and you add the closing costs into the loan, you may end up accruing more interest than you otherwise would pay if you didn't refinance.
Bottom Line
You should calculate the break-even point for a refinance by dividing the amount you have to pay in closing costs by the amount you will save on your monthly payment. This will determine how long it will take before you break even. If you do not plan to keep the refinanced loan for at least that long before you move or refinance again, refinancing won't be worth it.
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