Determine the best time to refinance a mortgage

NORTH COUNTY - Refinancing a mortgage is advantageous to homeowners for a variety of reasons. The primary reasons people refinance their mortgages are to reduce their monthly payments or free up equity to use toward home improvements or other necessities. Lenders will frequently advertise that “now” is the time to refinance, but people may want to get all of the facts before making their decisions.

A low interest rate is not reason alone to refinance. Conventional wisdom has long suggested that borrowers wait to refinance until interest rates drop 2 percent below their current rate. While a low interest rate is important, there are several other factors to consider.

*Closing costs: Refinancing a home is an expensive undertaking. While it can effectively shave $100 or more off your monthly payments, there is a financial outlay during the process, which includes closing costs. A person can expect to pay anywhere from 2 to 5 percent of the loan’s value in closing costs when refinancing. Lenders used to enable some to roll the cost of the closing into the mortgage, but stringent rules have changed the way many banks now do business. If the finances are simply not there to cover the closing costs, refinancing may not be an option.

• Credit rating: If a person’s credit rating is better now than it was when he initially earned his home loan, then this might be a good time to refinance. Not only will he benefit from a low market rate, the interest rate may be even lower because lenders look more fondly on him now than they did years ago. Lenders often base their assessments of borrower reliability and stability on those potential borrowers’ credit scores, so a strong credit score makes a borrower look better in the eyes of lenders. Borrowers with poor credit ratings may not benefit from refinancing.

• Income: A person’s debt-to-income ratio is another factor in determining mortgage interest rates and approval. A positive change in income status as well as reduction in debt could make it a good time to refinance.

• Adjustable rate mortgages: Many people opted for adjustable rate mortgages when buying homes years ago. Over time, their monthly payments may have increased considerably, making it nearly impossible to afford a home. Refinancing for a fixed-rate mortgage, regardless of the current interest rate, will likely ease some of their financial burden.

• Home value: A higher home value means more equity in the home. This money can be used to pay down debt or for home improvements that further improve the value of the home and property. It is important to speak with a real estate professional to determine if home values have spiked in a particular neighborhood and to gain an accurate appraisal of the home. This will help determine if refinancing is frugal.

• Interest rates: Lower interest rates often motivate homeowners to refinance, as a lower interest rate can save homeowners a substantial amount of money over the course of their loans. However, refinancing too soon (within four years of the original home loan) may put homeowners in a negative light. Lenders may see borrowers who refinance too soon or too frequently as risky borrowers who cannot successfully manage their money.

• Prepayment penalties: Certain mortgages have prepayment penalties built in. Should a person pay off the mortgage too early, usually within two to five years, two to four percent of the home’s loan value must be paid out. Refinancing counts as paying off one loan and opening up another. Penalties could deter a person from refinancing too soon.

Determining the best time to refinance a home mortgage takes effort on the part of the borrower and information about market trends. By doing one’s homework and being aware of certain factors, a person can save money by refinancing a home loan.