For many of us who are mortgage holders from time-to-time we find ourselves asking, “When is a good time to refinance my mortgage?” Hardly a day goes by without noticing many lenders advertising tempting deals to entice you to refinance your mortgage. That temptation to refinance can be huge because depending on your situation, refinancing your mortgage can be beneficial in areas such as reducing the interest rate, shortening or extending the mortgage loan, and even by getting some extra cash flow happening by lowering the monthly mortgage payments. A word to the wise though, refinancing must be done with great caution because not every situation can have the desired benefits.
Before we can answer the question ‘when a good time to refinance a mortgage?’ we need to ask the question – why refinance? Here are some common reasons that may answer the ‘why’:
- Current lending rates have dropped and mortgage interest rates become lower than your current mortgage rate;
- You want to extend the repayment period of your existing mortgage in order to lower your monthly burden of a high mortgage payments;
- Your existing mortgage has a variable rate and you want to protect yourself from future rate increases by moving to a fixed rate mortgage;
- You can get a better mortgage interest rate now because you have improved on your credit history; or
- The debt load is too high and may be more than you can manage – consolidation may be the only answer to manage monthly payments.
Only if you are likely to gain some financial benefit out of refinancing your mortgage should refinancing be considered.
It is very important to carefully examine the refinancing option because there may be both opening and closing costs of a new mortgage and for your old mortgage. Sometimes switching costs can be exorbitantly high and by far outweigh the benefit of a lower interest rate. As well, if you are considering a new mortgage, it’s imperative to carefully study the terms and conditions to ensure that without a doubt, you are getting a much better deal.
Now you can answer the question, when should you consider refinancing your mortgage?
While everything mentioned above are great reasons for refinancing, there are other items to consider as well. When there is sufficient equity built up in the home, this may be a good time to refinance. This is very important because the greater the equity, there is a greater likelihood of getting a good interest rate on a refinanced mortgage.
Some more great advice is that you should also find out if the current interest rates are much lower than the rate you currently have. Only when the interest rates are at a much lower level than what you currently have, should you consider mortgage refinancing.
While refinancing can be a fabulous opportunity to get a better deal on your mortgage, it is crucial to get expert advice on whether it‘s really going to be beneficial. Another question to ask an expert as well is, ‘are there any available alternatives that may help your financial situation?’ Discuss your financial situation with a mortgage broker who is trustworthy and has experience. Only then can you get the correct answer to the question – ‘should I consider refinancing my mortgage?’
I missed the boat on the great rates. I got my loan 2 years ago, then they dipped into the low 4%s, and now they are back to where rates were when I got my loan. Oh well!
You never know how rates will change in the future!
When we got our motgage last Summer, we thought we were at the bottom of the rate roller-coaster; rates had dipped and then started going up again. Lo and behold, rates would go down by about a quarter point after we locked.
When I bought my first house, I was unable to refinance when rates dropped because I had started a major renovation project that was not yet finished. Dumb, dumb, dumb.
Nowadays, I worry when I see people refinance with a very long term mortgage when they don’t need to lower their payments. They often don’t run an amortization schedule and see that they’re adding thousands onto their interest costs.
The other common mistake is to assume it’s worth refinancing even if you’re not going to be in the house much longer. So many people forget to factor in their closing costs for refinancing and end up spending more in fees than they save on interest (when they’re only in the house for a few years after refinancing.)
You make some great points to keep in mind Pamela!
If you’re going to be in your home only for a few years, you may still be able to refinance and take advantage of a lower rate, just make sure you keep your closing costs low. Most lenders will pay all or part of the closing costs, your rate will just be a little higher. If your payment is significantly lower than what you have even if the lender is paying closing costs for you, then by all means take advantage of it.
Hi Glen, Nice write-up. It looks like we have a lot in common:stay at home Dad, father of 3, personal finance blog, and Yakezie. Cool.
Great to hear I’m not the only one with those circumstances!
I have considered refinancing some of my rental properties and may look into it now that I have a few tasks under my belt. I could refinance for a similar term to the remaining time on the mortgage and still save money.
If it works out financially then go for it.
One thing you might want to do is run each property address through the following link. If your loan is owned by Fannie Mae and you got it before spring 2009, you may be able to refinance under HARP. HARP loans have caps on many of the usual loan pricing adjustments, so it could be cheaper to get than a standard conventional refinance. When you have investment property, may as well save as many dollars as you can!
The key questions are – how long do you plan to stay in the home, when do you want to pay off the mortgage or sell the property, what will your income look like in the next 3, 5 – 10 years – do you need better cash flow with lower payments or a workable repayment plan to pay off the mortgage sooner – knowing the borrower’s short and long term plans and financial goals is necessary to make the best options avilable – the numbers of actual cost and benefits are the answer – show the total costs of principal and interest over 5 year periods and the total for keeping the loan for the full term, these are the real costs and savings for the borrower.