When is the right time to refinance my mortgage?
There is no concrete answer as to when it is the right time to refinance a mortgage. There are several factors that play into this decision. Qualification, Costs/rates, future plans, and current needs all factor into the decision. I'll explain a little about each below, and how to weigh the options of a refinance.
Qualification: Sounds simple enough, you have to be able to qualify for a loan in order to refinance. More importantly, what exactly do you qualify for, and how would this new loan benefit you. Guidelines are always changing, and depending on your personal situation you may want to expedite a transaction if you are close to not qualifying for a loan. For example, if you are hearing that lenders are raising a minimum score requirement and you know you are at or below that requirement, this factor may take precedent over other factors below, because you may not be able to refinance at all in the near future. Unfortunately with the current state of guidelines, many borrowers seem to be left out as they wait for a specific time/rate/program etc, only to find when that time comes that they no longer qualify.
Costs and Rates: Closing costs and interest rate are typically the most important factor in whether you should refinance. Sometimes other factors, such as cash out, or debt consolidation may allow you to refinance to a higher rate and still achieve a benefit, but often the interest rate of the new loan and the savings it provides is the primary reason for refinancing. On a typical rate and term refinance, where you are refinancing to lower you rate and therefore payment, you should compare 3 items.
What is your monthly payment savings by refinancing, how much do you save for moving forward with the transaction.
What is your true interest savings? Your payment may be altered by shortening or lengthening a term, but monthly interest savings is an apples to apples comparison. Plainly put, how much are you paying the bank right now to have borrowed their money? How much will you be paying the bank after the refinance? The difference between the two is your true interest savings. This is what matters most as interest is lost money. Every dollar paid above this figure, is worthwhile because it is paying your balance down. Every dollar from this figure and below is simply your cost of having borrowed money from a bank.
What are your closing costs? Every loan has closing costs, they may be paid by you, or paid by the lender as a way to structure the loan, but they are being paid somewhere. You need to weigh any costs you are paying versus your payment and interest savings and find out how long it will take you to recoup the investment of closing costs.
For example, if you are saving $200 a month by refinancing, but your closing costs are $3000, you know that you need to keep this loan at least 15 months for it to be beneficial (3000/200=15). If you sell the home or payoff the loan inside that 15 months the refinance is not worth it, as you spent more to obtain the loan ($3000) than received in monthly savings.
Future Plans: Your future plans, while less tangible than interest rates and closing costs should play a role in whether or not to refinance. For example, if you expect your income to rise, this may mean that you will want to upgrade to a bigger home. If that is the case you would have a shortenedtimeframe for keeping this loan and must be sure it will be of benefit to you in that time. If you are planning on moving out of the area 3 year or 4 years down the road, there is no reason to consider a situation that may take place 10 years down the road, as this loan would long be paid off by then. If you know you have additional expenses coming down the line (college funds, wedding, etc) you must account for how they fit in with your loan plans. Ultimately you need to make certain that the loan fits you not only right now, but in the future. A knowledgeable lending professional will know that a loan isn't about the right now. It's about how that loan fits into your entire picture. If you or they can't explain how this loan benefits your long term goals, it's not the right loan for you.
Current Needs: Lastly and sometimes most importantly are current needs. There will inevitably be times when a current need outweighs nearly all other factors listed above. There may be a case due to an illness or family situation where you need to access equity quickly. In this case, you must be wary that you are obtaining a fair loan, but also understand that if it suits your needs there may be a benefit to refinancing. It is important in this case to weigh the long term repercussions of taking the refinance, but if you have done so, and have a pressing need, it may outweigh other more tangible factors like the ones listed about.
There are certainly other factors that may come into play as each situation is different. Ultimately speaking with a loan officer that you trust can be very helpful in ascertaining whether it is the right time to refinance. If however, you want to do some homework on your own ahead of time, make a list of pros and cons based on the factors above and you'll be well on your way to knowing if the time is right to refinance.
The right time to refinance your mortgage can only be answered by you with the assistance of a mortgage professional.
You have to evaluate how much it is costing you to do the refinance, how long you will own the home, your monthly savings and how long it takes you to recoup the cost of refinancing. A mortgage professional worth his or her salt should help you answer those questions. If the loan officer you are working with does not ask you or counsel you on the items I previously mentioned than you should probably move on and find someone willing to guide you in the right direction.
Many borrowers get blindsided by the allure of super low interest rates and are sticker shocked when they receive their loan paper work. Again a good loan officer should be able to show you benefit even if the rate you receive is not what the Jones’ are touting at the neighborhood social.