When To Refinance

Posted by Jennifer Quilter

Knowing when to refinance (or when not to) is one of the main deciding factors in whether you should pursue refinancing.

The most basic thing you need to know is that to refinance means you are getting a whole new loan and starting over. This means that on top of closing your current loan you need to open a new one, and as I’m sure you remember, there are a lot of fees to take care of when you get a mortgage. To decide whether it’s really a good idea you really do need to go through and tally up all the individual costs, you can however, make a general estimate. On average, assuming you don’t have any prepayment penalties, your costs will be around 3% to 6% of what you have left to pay on your mortgage. If your current loan has prepayment penalties that will be an additional expense.

When you see those numbers it can easily feel like this is something you shouldn’t do, but before you make up your mind take a look at the numbers you can save and that will tell you when to refinance.

When you get a new loan you are hopefully getting a new, lower, interest rate. As a general rule of thumb you want to look for a rate that is two percent lower to make it worth it. This will lower your monthly payments. Figure out how much you will save monthly and then how long it will take for that savings to pay off. Now, and here is the important question of when to do this, will you still be living in the house then? Because if you’re not, it is a waste of money to go through with this plan. If you will be, then you will be saving yourself money over the life of the loan and the sooner you do this, the sooner you save money.

Of course, there is another important factor for when to refinance involved in the search for that pivotal number- the lower interest rate.

I recommend looking at five companies before picking one to compare rates and terms. When you have the companies with the lowest rates picked watch them for a while- the rates go up and down, if they are on a downward slope, wait a little while until they hit the number you really want. Of course, don’t wait too long or they’ll start to jump back up again.

You want to make sure all these factors come together for you with the high costs involved you really only want to ever do this once. This can be a great thing that saves you a lot of money as long as you know when to refinance.