A new year has arrived, and with it a fresh crop of New Year's resolutions. But instead of promising to go to the gym four times a week -- you know you're not going to do that -- how about resolving to study your mortgage loan instead? After all, you might be able to tweak that loan to save hundreds of dollars a month.

But you'll need to perform a quick loan analysis first. And what better time to do this than the start of a new year?

Time to refinance?

"There always seems to be a lot of noise about mortgage rates. You probably get blasted with e-mails or other marketing about some amazing rate that should not be passed up," said Brook Benton, vice president with Atlanta's PrivatePlus Mortgage. "Still, this is a bit of a 'where there is smoke, there is fire.' If you are seeing news of low rates, check in with your banker or a trusted mortgage professional."

A refinance isn't free. You can expect to pay anywhere from 2 percent to 6 percent of your outstanding loan balance to cover the closing costs. But you might also shave $100, $200 or more off your monthly mortgage payment by refinancing your existing loan to one with a lower interest rate.

Freddie Mac, in its Dec. 31 Primary Mortgage Market Survey, reported that the average interest rate on a 30-year fixed-rate mortgage loan stood 3.87 percent. That rate was 3.15 percent on 15-year fixed-rate mortgage loans.

But how do you know whether your loan is ready for a refinance? It all depends on your long-term housing goals and the interest rate already attached to your existing loan.

The numbers

David Reiss, professor of law and research director with the Center for Urban Business Entrepreneurship at Brooklyn Law School in Brooklyn, N.Y., says that homeowners need to take a close look at their mortgage loan before deciding whether refinancing is a smart financial move.

"I would consider some practical aspects of the mortgage refi process," Reiss said. "How much will you save each year by refinancing? How much will it cost to get the new mortgage? How many years will it take you to recoup that cost in reduced interest rate payments?"

Your existing interest rate is the key to these calculations. If you took out a $200,000 30-year fixed-rate mortgage loan with an interest rate of 5 percent, you'd pay about $1,073 a month in principal and interest. (This figure doesn't include any property taxes or homeowners insurance dollars that you might be paying through escrow.)

Say you now owe $180,000 on that same loan. If you refinance your loan to a 30-year fixed-rate loan of $180,000 with an interest rate of 3.8 percent, you'd pay about $838 a month in principal and interest. That's a monthly savings of about $235 a month or about $2,820 a year.

If it costs you $9,000 in closing costs to refinance this loan, you'll recoup these costs in about three years and three months. Then you'll enjoy savings every month until you sell your home, refinance your loan again or pay off the loan in full.

How long do you plan to live there?

The key, then, becomes how long you plan to stay in your home. If you expect to move in two years, even this refinance won't make sense: You won't have enough time to recover your closing costs and enjoy any real monthly savings.

"It is best to let fundamentals drive that decision," Reiss said. "Most important, how long do you expect to remain in your home? If you are not sure that you will be there for a few years at least, the cost of refinancing may be more than the amount you save in decreased interest payments."

Benton recommends, too, that consumers be wary of the interest rates they see mortgage lenders advertising online or on the radio. Sometimes those rates are only offered to those homeowners with the highest possible credit scores.

The rates available to most homeowners might be higher.

Benton said that the smart move is for homeowners to call mortgage lenders, share their financial basics with them and then discuss possible refinance options.

"If it sounds too good to be true, it typically is," Benton said. "We are always on our computer, phone or tablet. When you see some incredibly low rate being advertised, you should realize what they want. It peaks your interest so you click on it or call the number provided. More often than not, these amazing rates come with significant fees and closing costs. This is why you need a trusted advisor to help filter such offerings."

Published on January 6, 2015