Should You Refinance? The Rule of Thumb Has Changed

(MoneyWatch) 

If you gather 'round the water cooler long enough, you'll hear a lot about two things: sex and mortgages. Everyone talks about who they're dating and when they're going to refinance.

For either subject, the question being asked these days is when you should actually pull the trigger.

There used to be a rule of thumb that said "Don't refinance unless you could drop the interest rate by 2 percentage points." And that rule of thumb lasted for a long time, until no-point and no-cost refinancings were introduced. Then, the rule of thumb changed to "Refinance if you can save money within 6 months of refinancing" (many folks were able to save starting the month following the closing). These days, banks are charging astronomical fees for refinancing (hello bank profits!), and there are many people for whom it would take literally 5 to 6 years to pay off the costs of the refinance with their "savings."

Here's my new 2009 rule of thumb: Don't focus solely on how low interest rates are. Instead, take a look at what you'll be saving and how quickly you can pay off the cost of the refinance. If you can shorten the term (or what's left of it) of your loan AND save money each month, that's worth bragging about. My colleague Kathy Kristof's column on how to rethink your refinance might be helpful.

And think about this: While you may think you'll stay in your house for the next 15 years, the average homeowner keeps a loan just 7 years.