Deciding the best time to refinance your mortgage will depend upon many factors; it is not just when interest rates are low. Many Americans get the facts by using a mortgage calculator choose to refinance their home every day for a few common reasons:
- Increase retirement saving by investing in real estate or the stock market
- Improve the home, such as a revamped kitchen, bathroom and family room, which can lead to a higher sales price when you list it
- Paying for a college education
Any time that mortgage rates are very low, many homeowners will pull out cash and use it for the above reasons or for many others. But what about you? Should you be refinancing right now and how to make the best decision? Let’s look at several points in detail:
#1 What Will You Save If You Refinance?
Most of us refinance to save in one or both of these areas:
- On our monthly mortgage payment
- On the overall interest that we pay on the home over the years
In a best case scenario, doing a refinance will allow you to save on both. However, you can find by using a mortgage calculator online that this will not always happen.
For example, if you have 25 years left on a home loan and you refinance it again for 30 years at a lower rate, sure you are getting a lower payment. But if you use the online mortgage calculator, you can see that you could well end up paying a higher interest rate over time because you are paying off your loan over 35 years.
However, if you have 25 years on the loan and you refinance into a 15 year mortgage, you can see on a mortgage calculator that your payment could increase. But you may pay $20,000 less on interest over the years, and you will pay the house off much faster.
A good online mortgage calculator such as the mortgage calculator at Bankrate.com. It can help you to run various scenarios that will show you the costs and what you stand to save by doing the refinance loan.
Note that doing a refinance has closing costs, application fees and loan origination fees. You will need to figure those costs into your mortgage refinance calculator to see if the benefits outweigh the costs.
#2 How Long Are You Staying in the Home?
For most Americans, it is logical to refinance if you are staying in the home for at least three or four more years. If you want to sell the home next year, you probably should not do it. Your refinance could take three months and it may take years for you to break even, after you factor in closing costs.
You can use your mortgage calculator as well to determine when the break even point is if you refinance.
#3 Can You Qualify?
If the refinance mortgage does make sense, you still need to qualify for your new loan. Just because you own a home and are making payments each month does not mean you qualify for a refinance. Being able to refinance depends upon the following:
- How much equity you have
- How much your income is
- What your credit score is
When you apply to refinance, it is usually an entirely new underwriting process, unless you have an FHA loan and do an FHA Streamline Refinance.
For most conventional refinances, the bank must check that the home is worth more than what they are loaning, and that you can afford the payments. They also need to run your credit score to see if you are a good risk.
If you owe more on your home than it is worth, qualifying for refinancing is usually impossible. There are some government-run programs to consider if you are underwater on your loan, such as the HARP program.
#4 Yes Or No?
All home loan situations are different, but many experts say that you can refinance if you think the following are true:
- Current interest rates are 1% lower than your rate, or lower
- You want to stake in the home at least five more years
- You think you can get approved
Deciding if you should refinance is a big step, so you should use an online mortgage calculator to game out the various scenarios. See if you are going to really be saving money in the long and short term.
The Bottom Line
Refinancing your mortgage is very popular, and most people will refinance without a thought if the current interest rates are significantly lower than your current rate. However, as we point out above, you really need to do your financial homework to figure out if it all adds up to do the refinance. You want to both save money in the short term AND long term, and if you aren’t, you may want to hold off on the refinance.