When is it a Good Idea to Apply for Mortgage Refinancing?

If you’re wondering whether to refinance your home loan, you’re not alone. It’s hard to know exactly when to refinance. Speak with a financial advisor before making such an important decision. Also, use our mortgage refinance calculator to get an idea of what your refinance home loan rate and monthly payments might be once changes are made permanent.

Before refinancing your mortgage, there are six factors to consider before deciding to refinance:

  1. Interest rates
  • Length of time you plan to stay in your home
  • Your loan type and terms (adjustable or fixed interest and term length – 15, 20, 30 Year)
  • Your home equity (value built into the home or real estate market)
  • Your credit score
  • PMI

In some cases, refinancing a home mortgage makes sound financial sense; in other cases, it may be more useful to stick with your current loan. There are some cases in which refinancing a home mortgage can reduce your overall financial benefit. For example, refinancing addicts may pay a hefty price for multiple moves to lower mortgage rates by leaving a trail of closing costs in their wake.

Before you refinance, know where you stand with your current mortgage and how refinancing better lending terms can help improve your financial safety net.

When to Refinance Your Home Mortgage

Refinancing a mortgage means paying off an existing loan and replacing it with a new one. There are many common reasons why homeowners refinance: to obtain a lower interest rate, shorten the term of a loan, convert between adjustable-rate mortgage (ARM) and fixed-rate mortgages, tap into a home’s equity in order to finance a large purchase or pay off debts.

Some of these motivations may help homeowners while others may harm, because financing is like taking out the original mortgage – requiring appraisal, title search and application fees – it is important for a homeowner to determine whether his or her reason for refinancing offers true financial gain.

Save Money with a Lower Interest Rate

One of the most common reasons to refinance a home mortgage is to lower the interest rate on your existing loan. Historically, the accepted rule is to refinance if you could reduce your interest rate by at least 1 to 2%. Reducing your interest rate not only helps you save money, but it can reduce your monthly mortgage payment and it increases the speed at which you can build equity in your home.

Shorten the Length of Your Loan

Thirty years is a long time to commit to a house payment. When interest rates fall, homeowners often have the opportunity to refinance an existing loan for another loan that, without much change in the monthly payment, has a shorter term. This means homeowners can get out of debt sooner and save a significant amount of interest in the process.

Convert between Adjustable-Rate Mortgages (ARMs) and Fixed-Rate Mortgages

While ARMs entice home buyers by offering lower rates at the start of the loan, periodic market adjustments often result in interest rate increases which may be higher than the rate available through a fixed-rate mortgage. When this occurs, converting to a fixed-rate mortgage results in a lower interest rate as well as eliminates concern over future interest rate hikes. Converting to an ARM may also be a good idea for homeowners who do not plan to stay in their home for more than a few years (5 or less).

On the other hand, converting from a fixed-rate loan to an ARM can also be a sound financial strategy when interest rates are expected to fall (and stay there for a lengthy period). If rates continue to fall, the periodic rate adjustments on an ARM result in decreasing interest rates and smaller monthly mortgage payments, eliminating the need to refinance every time rates drop.

Tap Into Your Home Equity for Expenses or Debts

Homeowners often access the equity in their homes to cover big expenses, such as the costs of home remodeling or a child’s college education. Homeowners should be cautious however, as mortgage refinancing can be a slippery slope to never-ending debt.

If you home has accrued some equity, you may refinance your mortgage loan for more than you currently owe to get access to the cash you need. Some homeowners use the money to reinvest in their home or other ventures, while many refinance in order to consolidate their debt.

On the surface it may seem like a good idea to replace high-interest (credit card or student) debt with a low-interest mortgage, unfortunately, refinancing does not bring with it an automatic dose of financial prudence and debtor tend to accrue more debts.

When is it NOT a Good Idea to Refinance?

A little financial planning and number crunching may indicate that refinancing a mortgage is not right for you at this time. If you do not plan to live in the house for more than 5 years or beyond, it may be best to stay in your current mortgage. And if you are underwater in your mortgage – owe more on the house than it is currently worth – then you may be not be able to refinance with a normal lender, but you may be eligible for refinancing under the Home Affordable Refinance Program (HARP).

Speak with Your Mortgage Lender to Decide if it is Time to Refinance

Refinancing can be a sound financial strategy if it reduces your mortgage payment, shortens the term of your loan or helps you build equity more quickly. When used carefully, it can also be a valuable tool in reaching investment goals, making large purchases or getting your debt under control. Before you refinance take a careful look at your financial situation and ask your trusted financial advisor or lender how much money you could be saving by refinancing.

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