People choose to refinance their mortgage for a variety of different reasons; including home repairs, medical bills, paying off school loans, change mortgage programs or even to lower the interest rate on the account. If you refinance at the “right” time and do your research, you can avoid costly mistakes that homeowners often make when pursuing this option. Some people tend to apply for a refinance the moment they feel they have enough equity to secure some extra cash. But this is not always the wisest decision..

You must think about what is motivating you to refinance and if this is something you truly need – or is it just an unreasonable desire. Always factor in the condition of the housing market and current mortgage rates to determine if NOW is the right time to secure the refinance.

Asking when one should refinance a mortgage is a common request and particularly in these trying financial times. Whether you’ve just moved in a year ago or you are now going on a decade living in your home, it’s never too late (or early) to explore this option.

UPDATE: Although mortgage rates have been near historic lows for over a year, they’ve recently increased over 1% for an average 30-year fixed-rate mortgage as speculation over the Fed’s decision to end their bond-buying program – which was aimed to keep borrowing costs low. As of today, the average 30-year fixed loan has an interest rate of approximately 4.5%. Although rates have recently been on the rise, they are still MUCH lower than the rates offered for most of the 2000s and I would say it’s an awesome time to capitalize on rates while they’re still below 5 percent.

Refinancing your home means that you are acquiring a new mortgage and new payment schedule for a 15- to 40-year term. But if the interest rate is favorable, this can easily save you thousands of dollars over time. Many homeowners purchase property when they find a home they fall in love with, regardless of the interest rate being offered. If you purchased your home in early 2000s, it’s likely you are stuck with an interest rate of 5-6% or higher. Current mortgage rates should always be in the back of your mind when considering a refinance.

Despite the fact that the nation’s housing market is slowly recovering as home prices gain momentum, still about 1/5 of all homeowners owe more on their mortgage(s) than their home is currently worth (i.e. underwater mortgage). This is going to prevent many people from achieving a refinance. Since the market crashed in late 2007, home values have plummeted in many areas across the country – causing millions of homeowners to be stuck with a mortgage they could not afford. Today, it’s believed that about 1/4 of foreclosures are due to “strategic walk aways” from homeowners with negative equity.

If your home has not lost value and you still have some equity, then now may be the ideal time to refi – especially if you have an interest rate above five or six percent. Qualified individuals should be able to secure a low-interest rate of about 4.5% for a 30-year fixed-rate mortgage (FRM), and as low as 3.5% for a 15-year FRM or an adjustable-rate mortgage (ARM).

You really need to do the “Ben Franklin” in order to compare the pros and cons that you face when deciding if now is the right time. You need to see if it’s a viable option and whether or not you’re going to save money in the long run. Shop around, compare mortgage deals and do business with someone you trust!

Many people believe it’s in their best interest to go directly to a bank in order to get the lowest rate quote in today’s market, this is simply untrue. You can find many lenders locally and online who may offer outstanding rates and terms for your particular situation.

Borrowing Tips

You need to first understand the consequences before making an educated decision. If you are pursuing this option simple to pay off an outstanding unsecured debt, you may even end up with more debt that is now using your home as collateral if the loan is unpaid. Although you have taken care of some unsecured debt, that obligation is now secured by your property. If you happen to secure a refinance with a higher rate than you originally obtained, your new monthly payment is likely to increase as well – increasing the total amount of interest you will pay over the course of the loan.

There’s always risk factors when refinancing your mortgage, even when rates are low and everyone is saying that “now is the right time to refi.” If property values happen to fall as they did during the recent housing recession, you could end up owing more on the mortgage than the home is worth. No one can predict the future of the housing market, so it’s up to you to decide when it’s the right time for you to secure a refinance.

Erik Sandstrom
LoanSafe's Mortgage Expert
I'm a Senior Loan Officer and LoanSafe mortgage expert. If you need a live rate quote, or need help getting a new mortgage, please call me direct anytime at 619-379-8999.