When is the Best Time to Refinance a Home Mortgage?

The news is bustling with the revelation by Federal Reserve Chair of the Board of Governors, Janet Yellen, that interest rates will be rising in the future. Such a step will effectively end the entity’s “quantitative easing” policy, and, provide lenders with ample incentive to hike rates on all types of debt instrument products. These include such loans and credit lines as: private student loans, small business loans, credit cards, auto financing, and, of course, home mortgage loans.

With such impending changes, homeowners might be asking whether or not it’s time to refinance their mortgages, or, is it smart to keep their existing loans? Those certainly good questions, and, there are considerations which can provide answers. Current rates are still near historic lows, but there are incremental upticks. Because the Federal Reserve is sending a clear message, now is the time to think seriously about refinancing, or, buying a new home.

When is the Best Time to Refinance A Home Mortgage?

There are two primary reasons homeowners refinance: to lock-in a lower, fixed rate mortgage, and, to pull money out of equity to use for improvements and repairs. Nearly regardless of the reason why, refinancing is a big financial decision. It’s important to note the common misconception about refinancing is that it’s some type of repackaging or extension of a current mortgage. That’s simply not the case — it is applying and being approved for a new home loan.

Homeowners who refinance in the right time can avoid costly mistakes. You must factor in your motivation and needs, the conditions of the real estate market, the current economy and the price of real estate. An initial financial benefit might be appealing, but refinancing requires some research to make an informed decision. —San Francisco Chronicle

This means that the borrower will have to pay closing costs, which include a slew of expenses, and, ranges between 3 percent and 6 percent of the loan principal. Because of the large expense, it’s worth comparing refinancing and selling and buying another home. It could well be that buying and selling to get a new property that better fits your needs is a better choice, and, makes financial sense for your situation. Here are some more considerations to take into account to know if home mortgage refinancing is right for you:

  • How long will you stay in your home? This is the single most important aspect of refinancing because it literally dictates whether or not it’s a worthwhile endeavor. A simple rule of thumb is, if you’re staying in your current home at least three to five years, refinancing is a viable option. However, if there’s any chance you’ll move, it’s a deal breaker because you won’t live in the home long enough to recoup your upfront and long term costs through saving with a lower rate.
  • How much money will you save under the new rate? This goes right alongside the length of time you’ll stay in your home. In general, if you’re only going to cut your current interest rate by .25 to .50 basis points, it’s either too close to make a difference or just not worth the time and effort. However, cutting your current rate by .25 to .50 basis points, and, you’re going from a variable interest rate to a fixed interest rate, then, it’s smart to refinance if a majority of the other factors also favor refinancing.
  • How are you going to pay closing costs? If you’re going to pay closing costs out-of-pocket, refinancing is an option. Conversely, if you’re going to roll the closing costs into your new loan, it might make it a bad deal.

Another consideration is about the condition and trajectory of your neighborhood. Should the neighborhood be surrounded by new residential and commercial developments, that’s a good dynamic that will have a positive impact on your home’s equity. However, if the neighborhood is, or soon will be, past its prime, it’s better to sell and buy new.