Refiniancing a Mortgage: When Should I Refinance?
The average U.S. homeowner will go about refinancing a mortgage every three to five years. But refinancing does not have to adhere to that schedule. In the decision to refinance, mortgage rates play a big part in the timing. Interest rates that are 1/2% to 5/8% lower or higher than your current interest rate bear consideration. If interest rates are rising and driving up the cost of your ARM, you may want to switch to a fixed-rate mortgage and lock in a lower rate. On the other hand, if interest rates have fallen below that of your fixed-rate mortgage and you plan to inhabit the property for only a few years, you may want to switch to an ARM when you refinance. Home loan interest rates change all the time, so it is in your best interest to monitor them regularly, either on your own or with the help of an automated email service that will send you updates on the latest changes.
These services are available from a number of banks and lenders.
In addition to changes in mortgage refinance rates, your financial situation can tell you when it’s time to refinance. Maybe you were promoted at work or maybe your significant other decided to stop working and now you’re a one-income family. Financial changes for the better or worse affect your ability to make mortgage payments. In the first case, a higher income might mean that you can afford to make fewer but larger monthly payments, thereby reducing the overall interest and earning equity faster. In the second, you might need to lengthen the term of your loan to reduce monthly payments to a more manageable amount. Also, if your credit rating has improved, you may be eligible for a better interest rate if you refinance.
Another reason to refinance is to avoid costly private mortgage insurance (PMI) that homeowners generally incur if they make less than a 20% down payment. Once you’ve built up at least 20% equity in your home, you generally can work with the lender to cancel the PMI. However, in some cases it’s easier just to refinance to avoid further PMI costs.
Those times when debt seems to creep ever higher are also ripe for refinancing. With a cash-out refinancing, you can use the home equity that has built up to pay off the outstanding principal and receive additional cash proceeds to pay off credit card or other debt. Cash-out refinancing is also a viable option if you need money for a major expense such as college tuition, a new car, or home improvements.
While there are many good reasons to refinance, there are also reasons not to refinance. If you are planning to sell your house in a few years, for example, the costs of refinancing may not be realized. Also, refinancing with a lower rate could reduce your tax savings if you have been claiming mortgage interest on your returns. To determine if refinancing now will indeed help you save money, use one of the Home Mortgage HQ refinance calculators.