When should I refinance my home?

There are different reasons why homeowners want to refinance, but when you take a step back to look at how refinancing will affect your financial situation, the reasoning may not add up to savings.  In other cases, it can be a smart money move.  Here are some of the common reasons why people refinance.

• Reduce your current interest rate - In most cases, simply reducing your interest rate will lower your mortgage payments and save you money. Talking to a mortgage banker will help you understand the cost, the savings, and if the savings warrant the cost of the refinance.
• Lower monthly payments - You can lower your monthly by changing the terms of your mortgage, especially if you have good credit and the current interest rates are lower than your current rate.
• Remove mortgage insurance - Once you’ve paid your loan down to 80% or less of the loan amount, refinancing may enable you to remove the mortgage insurance.  
• Shorten the term of the loan - If your goal is to pay your loan off quickly, you can refinance-to-prepay.
• Cash-out - This may require a home appraisal, but you can refinance your home loan to consolidate debt, make home improvements, or pay off medical bills.

If the interest rates are lower than what you are currently paying and don’t have any intentions to move out any time soon, then it may be worth it to refinance even if it’s only for a 0.5% rate drop.  Your savings on the current interest rates highly depends on your situation. 

If you plan to move out soon, it’s unlikely that you will see the benefits of refinancing your mortgage due to closing costs.  However, if you plan to live in the house long enough to recuperate the refinance expenses, and you can get a decent interest rate, then it may be worth it to refinance.  

The same factors that mattered when you first applied for a home loan are just as relevant when you refinance as well.  Since you are essentially transferring your existing home loan into a new loan if your credit isn’t great or your debt-to-income ratio is off-balance, then you may not qualify for the lowest possible interest rate.  You end up paying a higher mortgage rate and higher closing costs, or you could have just wasted your time and money trying to see if you qualify for refinancing.