How to Know When It's Time to Refinance Your Mortgage

By Michael Dell'Ovo

There are many reasons to refinance a home including:

Lower your interest rate to reduce the monthly mortgage payment;
Shorten the term of the loan to save possibly thousands of dollars in interest;
Take cash out to consolidate other debts.

These are all great reasons to refinance your mortgage, however, a few items should be considered first. A refinance is very similar to when you closed on the purchase loan for your current home. You will need to submit and application, credit will be pulled and you will need to be approved by the lender. Once you are approved an appraisal will be ordered as well as a title examination.

As a general rule, it makes sense to refinance if you can get an interest rate that is at least one percentage point lower than your current rate. Every situation is different and there may be other reason besides lowering your rate that might make sense. For example, if the purpose is to take cash out in order to pay off high interest credit cards, than even if the rate stays the same, it's possible to save money on your overall monthly expenses.

Questions To Ask Yourself:

How long do I plan on staying in this house after I refinance?
How much lower could I get my monthly mortgage payment?
How much will it cost me to refinance?

Once you have the answers to these questions, you can figure out if a refinance makes sense and when you will break even. Divide the cost of the refinance by the monthly savings and you will have the number of months it will take for you to break even after the refinance.

Keep in mind that you do not always have to start the clock over with a 30 year fixed. If you want to stay on track to pay off your mortgage around the same time as when you started, you can choose a shorter term mortgage. For example, if you are 5 years into a mortgage and rates improve, you can take a 25, 20 or a 15 year mortgage to stay on track or even shave off a number of years. A scenario like this could save thousands of dollars in interest over the life of the loan.

It is wise to ask the person who is handling your loan for a good faith estimate along with your mortgage rate quote. This way you can know exactly how much it will cost you to get the payment that is offered. Taking these calculated steps is necessary to know if refinancing now will make sense. Numbers don't lie, so make sure you take the time to do the math correctly and have a clear understanding of your goals.