How to Know When to Refinance

How to know when to refinance can be a difficult question for the average homeowner. There are many factors to be considered before making such a decision. Determining why you want to refinance your mortgage and understanding the advantages and disadvantages of refinancing should assist you in making the right choice.

1. Will the interest rate be lower in a refinance? Dropping the interest rate on your mortgage will save money in the long run. However, realize that if you also lengthen the loan terms you may have a lower monthly payment but end up paying the same amount of interest in the end.
2. Will the length of the mortgage be changed? Refinancing to a new 30-year, or longer term, fixed rate loan may lower the monthly mortgage payments. The mortgage could also be refinanced for a shorter term that usually provides a better interest rate. The home would be paid off in less years, saving on the total interest paid.
3. Are you moving from an adjustable rate mortgage to a fixed rate mortgage? Many people refinance to avoid the changing monthly payments that accompany an adjustable rate mortgage. A fixed rate mortgage allows the homeowner to have the same monthly principal and interest payment for the entire loan. 
4. Do you have equity in your home that you want to cash out? Some people have paid on their homes long enough to have built up equity. They may have paid on the loan for many years, or the value of the home may have increased. The difference between the home value and the home mortgage is known as equity. Knowing when to refinance may allow you to pull out some of the equity as cash to use for other purposes.

Warnings:

• Some mortgages have a prepayment penalty that may include refinancing. Check with your current lender to see if your mortgage has this penalty before refinancing.
• If you think you might move in the next few years, then you may not want to refinance. There will most likely be settlement or closing costs involved in refinancing. If you want a lower payment but may move in the near future, the closing costs may not be worth the lower payment for the short time that you will be in the home. There are various mortgage calculators available to help determine the break even point. 

Resource:

A Consumer's Guide to Mortgage Refinancing