Ask the lender or broker for a comparison of the up-front costs, principal, rate, and payments with and without this rate trade-off.
Be specific about the loan you want. The more precise you are, the easier it will be for a loan officer or mortgage broker to find the best rate. For example, do you want a 15-year or 30-year mortgage? Do you need a "jumbo" mortgage (more than $333,700)? Are you willing to pay points to reduce the interest rate? The answers to these questions will depend on several factors, including when you plan to sell the house and how soon you want to retire your debt. Only you know the answers, but the sooner you know them, the better.
It's better to follow the 2% Rule which suggests that you can enjoy the benefits of a home refinance if your mortgage refinance rate is 2% lower than that on your current loan. The interest savings will help you recoup the costs you've paid for the new loan provided you stay in the property for a certain period of time (break-even period). However, there are no-cost as well as low-cost refinance loans wherein the costs are included into the loan. But you can expect comparatively higher rates on such loans. Moreover, these loans are limited when the market is in a credit crunch.
Calculate the financial benefit of refinancing in one, two, or three years. Does the benefit compare with your plans for staying in your home?
Don't rely on published rates. "No one's going to advertise their worst product," says Keith T. Gumbinger of HSH Associates, a Butler, NJ, firm that tracks mortgage rates. "They advertise the best possible rate, which probably gets offered to only the top 10 percent of applicants."
