Determine your savings

Many people who want to refinance loans monitor market interest rates closely. A significant drop can translate to money shaved off of your monthly payment. In fact, even a slight drop can make refinancing worthwhile. But before you make a decision either way, it is wise to estimate what your savings will be if you choose to refinance loans.

First, you will want to do some checking with regard to interest rates and costs. More than likely, if you’ve been monitoring the market, you already have information about current rates. If your financial situation has changed significantly since your last mortgage (if, say, you had a baby), you should check to make sure that your interest rates will not go up. Fees are pretty standard with refinancing, but your current lender may offer to waive them if you have been a good customer.

After you have gleaned the refinanced interest rate and the fees, it is time to crunch some numbers. First, you will want to determine what your new monthly payment would be. There are many calculators on the Internet that can solve this equation for you.

Next, you’ll want to figure out how much of those savings will go toward paying the refinancing costs. Again, there are calculators on the Internet that can do this for you. The formula is relatively simple: Closing costs divided by monthly savings equals the time (in months) it will take you to break even.

There is one last consideration. When you refinance loans, the new, decreased interest rate translates to less tax deductions. Consult a tax professional before you refinance to make sure that you won’t lose money in this way.