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When is it Time to Refinance a Mortgage?

Homeowners have a variety of incentives to refinance a mortgage. It is likely that over the lifetime of a mortgage loan, a homeowner will refinance a loan at least once. Most times, a homeowner wants to obtain a lower interest rate which would drastically lower their monthly payments. At other times, a homeowner is interested in replacing one type of mortgage with another, making it advantageous to refinance. Homeowners should continuously be analyzing their mortgage and comparing it to what is available in the marketplace to decide whether or not they should refinance. In other words, the answer to the question of whether or not one should refinance should always be "it depends."

There are many professionals that can advise as to whether it is a viable option to refinance a mortgage. The key is to find a broker that can give objective advice because many brokers will always try to convince a client to refinance. Obviously, considerations about a homeowner's credit will always come into play when refinancing a mortgage. A refinancing loan will be treated as if it was a brand new loan, including costs and credit checks. The most important consideration when deciding to refinance a loan is the break-even point that dictates whether a homeowner actually saves money. In other words, there must be a financial incentive to refinance the mortgage.

How to Make the Refinancing Decision

Many factors go into the calculation of whether or not to refinance a mortgage. Obviously, the first factor depends on interest rates and where they are heading. If interest rates have dropped since the previous mortgage, it may make sense to refinance. In addition, if mortgage rates are lower and the borrower thinks that rates will be going higher, then it is advantageous to refinance. The major consideration in this regard is the costs attached to the loan. Lenders will charge closing costs, and possibly points, which will cut into the money that a homeowner may save from refinancing. These costs can be rolled into the refinancing loan which would either increase monthly payments or the upfront amount that the loan costs.

Homeowners may also use a refinancing option to take equity out of their home. This option is advantageous if the price has increased enough to justify the costs. This is one way for a homeowner to lock in the increased price of a home without selling, although the cash that the homeowner takes out reduces the equity value of the home. However, a cash-out refinancing gives the homeowner less of a cushion if home prices drop in the future. An additional factor to consider is the direction in which the home price is moving. Refinancing is always more advantageous for the homeowner in a rising price environment. In addition, banks are more likely to extend credit when home prices are rising. Finally, another consideration is the homeowner's personal financial situation. They may be able to use a refinancing advantageously by shortening the duration of their loan if they can afford higher monthly payments.

Questions and Answers

Homeowners may have many questions when considering whether to refinance a mortgage. Here are some of the common questions that are associated with refinancing.

Q. When should a homeowner pay the upfront costs versus rolling them into the loan?

A. If the homeowner will remain in the home for a long time, it is better to pay the costs.

Q. Is it a good idea for a homeowner to pay points when refinancing?

A. The decision to pay points depends on the interest rates. If points can get the borrower a lower interest rate, it may be advantageous to pay points.

Q. Are there risks to refinancing?

A. There are risks if a homeowner has added to their loan amount with the refinancing.

Q. How can homeowners learn more about the refinancing process?

A. Homeowners can obtain professional advice by consulting with a mortgage broker.

Q. How does a homeowner know about the costs that are associated with a refinancing?

A. The lender is required to disclose these costs in a good faith estimate that must be given to the homeowner before the loan is closed.

Q. How long does the refinancing process take?

A. The refinancing process can be complete in as little as 30 days or can take up to 90 days.