When Should I Refinance?

One factor to consider is the cost involved. If your closing costs on a refinance are high, and the amount you're saving per month is low, it doesn't make a lot of sense.

When exploring the possibility of refinancing your mortgage, there are many good reasons why you may want to seriously consider.

One reason is to pay-off high interest loans such as auto loans, personal loans, or credit cards that may be hurting your monthly cash flow. Paying off these debts can help shift non-taxable debt into your home at a low interest rate while giving you additional interest write-offs.

A good time to refinance is when you currently have an adjustable rate mortgage and the short term fixed rate is getting ready to adjust. For example if you have a 30 year mortgage on a 3/1 ARM that would mean that your interest rate will be fixed for the first 3 years of the mortgage loan. After the first 3 years are up, the interest rate will adjust and then it will continue to adjust once every 12 months (once per/year) thereafter for the remainder of the loan. Usually, this is a good time to look into refinancing. Consult your mortgage professional to see what your options are and what types of mortgages you will qualify for.

Another reason to refinance is to shorten your term. If you have been paying on your current mortgage and would like to save thousands of dollars off the remaining balance, shortening to a 20 or 15 year amortization may help.

One of the most common reasons for refinancing a home is to lower your monthly payments. You may lower your payments by lowering your interest rate, extending the term of your mortgage or a combination of both.

For example: You bought your home with a mortgage of $100,000 with an interest rate of 9% and a term of 30 years. Your monthly principal and interest payment is $804.62. You have lived there for some time now and reduced the principal balance on your mortgage to $80,000. You are approved for a new mortgage at 7%. Your closing costs are $5000. Your new loan amount will be $85,000 (you're including the closing costs in your new mortgage.) Your new principal and interest payment will be $565.51. You will save $239.11 every month!

You can use that extra money to compensate for a decrease in income or increase in expenses. Or, if your income and expenses have remained stable, you can put that money into a savings account or use it to pay down the principal balance of your mortgage.

If credit card debt is piling up, and you have some equity in your home, it is sometimes a good idea to consolidate that debt and roll it into your mortgage, if the payments make sense in the end.

In some cases, maintaining some cash reserve fund is more important than lowering the monthly payment. If you have significant equity on your home and if you are uncertain about your future income, refinancing to cash out is not a bad option. This is not a long term solution, but it buys you time to correct the problem. Remember, when you need the money most (such as the cases of illness or job loss), it usually is very difficult to borrow money. If you are in this situation, refinance to cash out before the unfortunate event occurs.

The most common reason that most people are refinancing currently is to lower their monthly payments/expenditures. While rates have crept up, they remain at historically low levels. This means that you may still qualify for a very low interest rate on a home loan while being able to pay off credit cards or other higher interest rate loans (whose interest is not tax deductible) and save money on a monthly basis. Please call me to discuss.

The best time to refinance is when fixed rates are low and qualifying for a loan is easy. With rates increasing substantially every month for the past several quarters, and lenders making it tougher each day for borrowers to qualify for refinancing, now may be the best time to refinance, especially if you are in an ARM type adjustable rate mortgage which is set to begin "going variable" or adjusting in the next few years.

The best time to refinance is when you feel it will benefit you financially or improve the quality of your life. If used wisely, the equity in your home can be your best tool for "life improvement".

» DISCLAIMER: The information contained in this article on 'When Should I Refinance?' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.