Interest rates move in curves: up, down, up and down again. When should you refinance? Every time the rate hits a new low? While it’s tempting to lower your interest rate, the costs to do so can become prohibitive. The old rule of thumb used to be: refinance only if you can lower your rate two percentage points. In other words, if you were at 8 percent, you should consider refinancing if you could get a new rate of 6 percent. As the loan business evolved, new loans became available that had little or no fee’s. This turned the old rule on its ear. If you could refinance a loan with no costs, even if the rate dropped just one half of a percentage point, it might be justified. For example, a $250,000 loan at 6 percent carried a payment of $1,498 (using a loan amortization calculator available at most business supply stores.) If that loan were refinanced at 5.5 percent with no fees, the new loan amount would remain at $250,000, but at 5.5 percent the payment would be $1,419. This paper shuffle just dropped the mortgage payments $79 per month!

Doesn’t sound like much, but over 30 years, this would amount to a savings of $28,440. To further beat the numbers into the ground, if the $79 monthly savings were invested in a tax-free IRA, and earned 4 percent compound interest, the balance in 30 years would grow to $55,000.

Here are Some Basic Rules for Refinancing:

1. Measure The Time it Takes to Re-Coup Loan Costs

If there are costs involved in the loan, you’ll need to determine what the break-even point is with your monthly savings, compared to the costs. Before you start, you’ll need to get a financial calculator that costs around $40 at most business supply stores. These calculators will provide monthly payments based on a loan amount, term of loan and the interest rate.

For example, if you refinanced a loan, and it cost you $8,000, and you saved $150 per month, it will take you 53 months ($8,000 divided by 150) to break even. This is a little under five years. If you’re going to relocate within five years, this loan might not make sense, since the monthly savings won’t cover the cost of the mortgage. However if this is your dream home and you’re going to stay there till you grow old, the loan makes sense.

2. Determine if Monthly Savings are Worth the Hassle?

These days, loans can be an exercise in futility. Some loans take as long as three to four months.

The loan might look good initially; perhaps you’re dropping your rate a full percentage point, but as the loan drags on, and the rate lock expires, now the rate reduction becomes only a half percent. Is the monthly savings worth the frustration? Some of the no-cost loans on the market make perfect financial sense, but the monthly savings can be somewhat nominal. Therefore decide what your minimum monthly savings needs to be and stick to that. For example, you might decide that you’ll refinance with no-cost as long as you can reduce your payment $100. If it’s anything less, tell your loan broker to put the process on hold until he can hit the number.

3. Consider Out of Pocket Costs

When considering a home loan ask yourself if the out of pocket costs are excessive. Many loans today are done by brokers who receive rebates at certain interest rates. For example, if a broker does a loan at 5.5 percent he might be getting three percentage points as a rebate from the actual lender. On a $300,000 loan, this amounts to $9,000 ($300,000 times .03) Lenders in this case usually offer to cover any up-front fees such as the appraisal and credit report costs. Certain costs such as the appraisal fee and credit report are normal, up-front charges. Anything else should be viewed with suspicion. For example, be wary of a lender who in addition to an appraisal and credit report fee, wants to charge an up-front application fee or loan points.

4. Will Rates Go Lower in the Near Future

While no one has a crystal ball, the trend of the market is sometimes obvious. Ask your real estate broker or even your financial planner for advice on where the interest rate market may be headed. Also ask your current lender what their policy is if rates drop significantly during the loan process. One strategy might be to not lock a loan interest rate if you feel like rates will decline from their current level. Since cancellation fees are illegal, you may consider moving your loan to a new lender if your current lender isn’t able to further reduce your interest rate.