There is no right or wrong answer or blanket statement that covers all situations. What to look for is the monthly savings versus the closing costs. On a smaller loan you will save less monthly even with a larger drop in interest rate. On a $600,000 loan dropping the rate .500% makes a bigger difference vs the same rate drop on a $60,000 loan.
When reviewing refinance numbers with your lender make sure you separate closing costs from escrows. Closing costs are the fees being charged to get the loan closed. Think of escrows as a forced savings account being held by the bank to pay future taxes and future home insurance.
You want to understand what closing costs are so you can analyze your break even point for a refinance (how much does the loan save you monthly vs. how much it costs you up front). Using the example above ($600K vs $60K loan), if the closing costs are $4,000 on both loans and you save $200 a month on the large loan and $40 a month on the smaller loan you can see the break even is very different between the two examples. On the larger loan you are saving $2400 a year and spending $4K today to get those future savings. Your break-even is short, 20 months. On the smaller loan the break-even is 100 months!
Be careful to also understand the difference between a no-cost refinance versus a refinance where you bring $0 to closing BUT the closing costs are wrapped into the loan increasing your payoff. You can bring $0 to closing (sometimes even get money back) but still pay thousands in closing costs.
Dan Griffin, Broker/Realtor
Keller Williams First Atlanta
200 Glenridge Point Parkway Suite 100, Atlanta, GA 30342