Refinancing Advice: When To Refinance

While many homeowners are tempted to refinance as soon as interest rates drop, there are some specific keys to help you determine when to refinance your existing mortgage. The goal is always to save money, but if you refinance without knowing all of the costs of refinancing, you may find that in the long-run, you are spending more than you are saving. Before refinancing, get the answer to these questions:

  • How much will I save every month?
  • How long will I be staying in my home?
  • What are the costs involved in refinancing?
  • Am I changing the terms of my loan?
  • Monthly savings

Monthly savings on a mortgage payment can be significant if you can lower your interest rate. However, before considering a refinance, it is important to estimate all costs that may change when refinancing. If your monthly savings is significant, it may be a good time to consider refinancing. Lowering your mortgage costs may also include a reduction in personal mortgage insurance (PMI). If your refinance means you may have to take PMI out again, it may not be worth refinancing.

Long-Term Savings

Many lenders suggest that if you plan to stay in your home less than three years after refinancing, in the long-run it may not be worth refinancing. The exception to this would be if you are changing from an adjustable rate mortgage to a fixed rate mortgage. Before deciding to refinance, use a refinance calculator to ensure that you are changing your mortgage significantly enough to warrant the refinance.

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Loan Term Changes

It is seldom a good idea to increase the term of your loan in order to reduce monthly payments. Homeowners who have been paying for their current mortgage for more than five years may find that while they may save money in the short-term by refinancing, in the long-term it may cost them more. If you originally had a 30 year mortgage, have paid on the loan for five years or more and then refinance into another 30 year mortgage, it will cost you more over the life of the loan. Before making a decision, make sure that you know how changing your mortgage terms will impact your finances in the long run.

Closing Costs Matter

Closing costs on a refinance can be significant and will greatly impact how much you will save by refinancing. Most mortgages incur closing costs that include appraisals, credit reports and legal fees. Before you decide that you want to refinance, find out what the breakeven on refinance costs will be and how they will impact your finances.

The decision to refinance a mortgage is not one that should be taken lightly. It is important to understand how a refinance impacts your finances both in the long-term and the short-term. Understanding the costs, loan terms and the potential savings can help you make a well informed decision about when to refinance.

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