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Good Question: When Should You Refinance Your Home?

MINNEAPOLIS (WCCO) - Mortgage rates have dropped once again to near all-time lows. This week's average rate for a 30-year fixed loan is right around 3.6 percent. That's almost a point lower compared with rates 12 to 15 months ago. It also has mortgage brokers' offices four times busier than a typical January.

So, when should you refinance your home? Good Question.

"In general we like to see a 1-point spread," Ben Coulter, a mortgage consultant with Metropolitan Financial, said. "I would recommend talking to someone in the mortgage industry and have them run the numbers."

He says people must first consider their goals and how long they plan to stay in their homes.

"If you've got 28 years left and you're looking at a 30-year fixed, then that's not a big leap, but if you've got seven years left on a 30-year and you're going to be resetting your mortgage back 30 years, that's not something I'd recommend," he said.

He also asks people to consider their current interest rate. Even people who could lower their rate by 0.75 percent might benefit from refinancing depending on how long it would take to break even.

Here's an example:

A family with a good home value and good credit has a $363,000 loan at a current rate of 4.375 percent. A mortgage broker might be able to lower it to a 3.625 percent rate with closing costs of $3,800. Or, if the family was willing to give up an eighth of a point to get to 3.75 percent, closing costs would be closer to $750. Estimating that would save $150 per month, the break-even point would happen after five months.

"It all comes down to your break-even point," said Coulter, who likes to keep it under a year.

People should also consider their credit scores. To get the premium rates, a person would need a score in the mid-700s. With imperfect credit, available rates would be closer to 3.8 percent or 4.0 percent.

Finally, Coulter says you need to consider what your home is worth. An appraisal can cost about $400.

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