For those who hold a current mortgage, just a quick note that interest rates for conventional fixed rate mortgages have dropped again to historically low levels. As a result you should compare your current mortgage with other alternatives available to see if it makes sense to refinance.
How can you tell if it makes sense to refinance?The way I approach this is to determine the net present value of the current mortgage payments over the remaining lifetime of the loan. Then I calculate the net present value of the mortgage payments if you refinanced. If you pay the closing costs out of pocket (these are costs outside of escrow items such as insurance and real estate taxes that you would need to pay anyway in the future), then you add this dollar value to the net present value of the refinanced mortgage payment. Whatever payment has the lowest net present value is the option that you should choose. Of course if it favors the refinance, but the difference is not material in nature, then it may not be worth the time and aggravation to refinance.
The traps I tend to find is when people only take the closing costs and divide it by the monthly savings to determine a breakeven point to make the decision on whether to refinance. This isn’t a trap by itself, but it is a trap if they extend their mortgage and fail to take into account the extension of payments beyond their current mortgage that they now have to pay. Also it doesn’t tend to pay off if you plan to move within five years.