If you’ve just bought your home or you’re thinking about buying, you probably want to get the best possible deal on your mortgage payments. Some people start thinking about refinancing even before they buy; particularly if you can’t get locked at a low rate now, but think you’ll probably be able to improve your credit and refinance in a year. Make sure you do the math and measure the hidden costs of refinancing, whether now or a year from now, to decide whether the time is right.

Only Refinance if You can Get a Better Rate

When some people see the rate drop half a point, they think it’s time to refinance. This isn’t necessarily the case. Generally speaking, it’s only worthwhile to consider refinancing if the rate is a whole point lower than your current rate. Make sure you can actually get the advertised rate, too. Sometimes you’ll see extremely low rates advertised, but you might not qualify for that rate. Find out what your actual rate would be, and if it’s not at least a point lower, don’t bother considering a refinance.

Calculate How Long You’ll be Paying for Your Refinance

Refinancing your mortgage comes with a cost. You may save $100 per month when you refinance. However, if you paid $6,000 to refinance, spreading that cost over the $100 per month you’ll be saving, you won’t realize any cost savings from your refinance for 5 years. If you’re planning to sell your home within five years, you won’t get any cost benefit from refinancing; in fact, it can actually cost you more to refinance and then sell early. Calculate how long it will take you to pay off your refinance by spreading the refinance costs over the amount you’ll save per month, and if you’re planning to sell before that timeframe has passed, you’ll be losing money when you refinance.