When Should You Refinance Your Mortgage?

by Scott Sery on December 11, 2012

You have seen the news and read it over and over.  Mortgage rates are at all time lows.  There are times when you should refinance, and if your loan meets the criteria, now may be the right time.  However, there are other times when it looks appealing but it is better to just keep making your payments.  How do you know when you should refinance and when it will make sense?

First of all, there are a few great reasons to refinance.  You can lower your interest rate, extend the payment time period, shorten the payment period, or combine a home equity loan into your mortgage.  Any of these is a great reason to refinance, but there is a timing issue that needs addressed.

Lower Your Payment

When you refinance (assuming you keep the same time period on your loan) you will be lowering your payment.  Through a combination of a lower interest rate, and spreading the remaining balance on the loan out over the next 30 years, the monthly payment will get smaller.  By using an online mortgage calculator you can figure out just how much smaller those payments will be.  Taking those savings, you can then calculate out how many months of savings it will take to make up the closing costs.  If it is 24 months or fewer, now is a good time to refinance.  Just remember, you will be restarting your 30 year commitment, so you need to think hard about refinancing if you are 10 years or more into your loan.

Combining Equity Loan and Mortgage

Home equity loans are always offered at a higher interest rate than mortgage rates.  Since mortgage rates are at an all time low, your home equity rate is probably quite a bit higher.  The only time it makes sense to roll your home equity loan into your mortgage is if you can keep your loan to value under 80%.  If you finance more than 80% of the home you will have to deal with Private Mortgage Insurance (PMI), something most borrowers feel is borderline racketeering.

Change the Term

Six years ago I purchased my house.  Three years ago I refinanced from a 30 year loan to another 30 year loan dropping my interest rate from 6% to 4.75%.  A month ago, I refinanced again dropping my loan period from 30 years to 15, and lowering my interest rate to 2.875%.  The reasoning was that I would have to pay $500 for a new appraisal to drop my PMI, and a full refinance cost $1,000.  The new loan, even though only half the length has such low interest that my monthly minimums (PITI) went up $75.  I want to be debt free as soon as possible.  Paying off my mortgage in less than 15 years (I round up when making payments) is much more appealing than twice as long.

Mortgage rates are indeed low.  So low, in fact, that they can almost not go any lower.  If you are not too far along in your current loan, and you will save considerably by getting a lower interest rate, now might be the best time for you to refinance.  Your first step is to get some quick quotes from lenders; they will give you estimates showing their current interest rates and what their closing costs are.  Pick the one that looks the best, and then negotiate using the other lenders’ quotes as your ammunition.  You are in no commitment to buy until you sign the form saying you will not back out, so if at any point something does not seem right, you can get out.  Take a look at your loan tonight and see if the right time for you to refinance is now.

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Scott Sery

Scott Sery is a native to Billings, Montana. Within an hour in nearly any direction he can be found fishing, hunting, backpacking, caving, and rock or ice climbing. With an extensive knowledge of the finance and insurance world, Scott loves to write personal finance articles. When not talking money, he enjoys passing on his knowledge of the back country, or how to live sustainably. You can learn more about Scott on his website ScottSery.com
  • http://clubthrifty.com/ Greg@ClubThrifty

    We have refied all of our houses at this point. We have our house plus 2 rentals. It saved us a ton of money over the long haul. We always wait until the rate has dropped at least a point before we do so.

  • Jason @ WorkSaveLive

    We were looking to refi to a 15 but we stuck with the 30. It’s not something I wanted to do, but I couldn’t justify the 15-year payment. I did the math and over the next 6 months it would have only saved us $290 total. The biggest disappointment I had was that there was no drop in interest rate between the 30-year and 20-year mortgage. I was a little shocked, but oh well…it is what it is.

  • John S @ Frugal Rules

    We refied a bit too early and looks like we may not be able to do so again. I’d love to take advantage of the rates right now, but the one we have is also fairly good. Just a lesson in patience I guess.

  • http://twitter.com/CanadianBudgetB CanadianBudgetBinder

    The rates are super low that’s for sure. When we bought our house we thought we were lucky with our rate then 3 months later it went down further. So much for luck. We won’t be refinancing hopefully saying to the bank Adiós! Great Post.

  • http://www.moneylifeandmore.com/ Lance@MoneyLife&More

    I have been considering refinancing but my mortgage is only around 60k so it isn’t worth it to me right now.

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