When is it worth it to refi?

[llecs]

DW and I bought our first home in January for a FHA fixed rate of 4.75%. Already, our lender contacted us and offered to refi at a FHA Jumbo rate of 4%. We aren't going to move on this, even if it was worth it, but at what point is it worth it to refi? Is there a rule of thumb or formula when factoring in the costs to do so? If it matters any, the balance is $498k and the appraised value is $550k or $575k, depending on which appraisal you look at.

[Lel]

If you're planning on being in the same house for a while, refinancing now is probably a good option.  Most people try to identify a breakeven point for a refinance - the number of months of lower payments that would be necessary to recover the cost of the refinance, after which it's all money saved.  For those who are trying to cut their rate by 1/4 point, it may take a few years to recover the loan costs.  For a 3/4 point drop, I would expect your costs to be covered a lot faster.

You might be able to find a lender that refinance with no closing costs.  But the rate will probably be higher.

[llecs]

Thanks! Are the closing costs for a refi generally the same as a purchase?   *needs to dust off the old GFE*

[Anonymous]

The real wild card in this is the lender compensation rules that went into effect earlier this year. This has made it more affordable for a lot of borrowers because lenders can do a refi without charging the usual 1% origination fee. We are actually seeing some refinances that add very little to the existing loan balance.

Any borrower should examine 1) the amount added to their current loan amount and 2) the amount of monthly savings to determine their break even point. I have always felt that should be less than 24 months, and we are seeing this achieved much sooner, depending upon closing costs that can be dependant upon where the borrower lives.

I think if a borrower is serious about saving money, they should be less dismissive of the refinance idea than to say they are not going to move on it, even if it is worth it.

On your loan balance, if you could drop your payment by $150 to $225 per month without adding any thing to your existing loan amount, would that be worth it?