When Should You Refinance Your Home Mortgage?

The question many of us are asking these days is whether to refinance our mortgage, or wait for better terms or a better rate. While no one can accurately forecast where rates are headed, there are some steps you can take that will help you decide whether to refinance your mortgage now:

First: How much lower are the rates than what you are paying on your existing mortgage? Keeping in mind, especially if you are writing off some mortgage interest on your taxes, that a slight drop in rates may not make it worthwhile to refinance.

Second: If the rate is significantly lower, you may want to check what your monthly savings will be. When doing this, make sure you calculate the new mortgage payment after your refinance without factoring in any years you are adding on to the end. For example, if you owe 27 more years on your current mortgage, calculate your new payment using the new rate and the amount you are refinancing only over 27 years. Otherwise you might think you are lowering your payment more than you actually are, when you are really just adding years onto the end.

Third: So now you know how much you'd save each month on a refinance, but how much are the closing costs going to be for your refinance? You need to be sure that paying any closing costs (including points) are worthwhile. Here's some simple math: If you are paying $2500 in closing costs, and the reduced rate saves you $500 each year, you'll need to stay where you are for five years to reap the benefits. For many, closing costs are worthwhile, but for others who know they will need to upgrade, or have a job situation that can mean having to move, closing costs may eliminate any benefit of the refinanced mortgage.

Fourth: If you've arrived here, you have probably figured that you are saving enough over time to make your new rate and the closing costs worth moving forward. One last consideration: Do you think you will refinance again? This one may be close to impossible to answer easily, because who knows where rates are going. But, if you think they might go down, make sure you know what your lender's terms are as far as refinancing. Some lenders will not refinance a mortgage for 90 days after the close of the one you are doing now. Make sure you are getting enough savings to not worry about that.

Fifth, and finally: One last word of caution: Once you lock you may have to pay fees (e.g. for an appraisal) that might not be recoverable if the loan does not go through. One of the biggest issues you could run into is that your appraisal is not high enough to qualify you for the mortgage. You may want to carefully look at comparable sales in your neighborhood, or, even better, talk to someone who is aware of the real estate market in your area, to be sure that your home will be appraised at a high enough value to meet the criteria of your loan.

If you've made it this far, you may be inclined to go forward and refinance. Best of luck! Information in this article should not take the place of a conversation with a finance and possible tax professional who is aware of your unique situation.