Is it the Right Time to Refinance?

The chance to refinance a mortgage at a lower interest rate is sure to get a homeowner's attention. But it's not always the right decision.

Having bragging rights at the neighborhood picnic isn't a reason to refinance. Instead, it's good to put some thought behind the timing of your decision.

Before deciding whether or not to refinance, you need to determine what you want to accomplish. Remember, a refinance doesn't pay off the debt; it just restructures it, often at a lower interest rate and a different loan term than the current mortgage.

Reducing the interest expense is the most common goal of a refinance. But some homeowners also appreciate the ability to extend the loan back out to 30 years, reducing the monthly payment.

Debt consolidation is another goal of refinancing. If you have both a first mortgage and a home equity mortgage, combining the two mortgages into one fixed-rate mortgage levels out the payment over the loan term.

Many homeowners refinance because they want to get out of (or into) an adjustable-rate mortgage. In high interest rate environments, homeowners are attracted to ARMs because they typically are at a much lower interest rate than a 30-year fixed-rate mortgage.

On the other hand, in low interest rate environments, the differential between the fixed-rate and the ARM isn't as great, and homeowners like the security of locking in a fixed rate over the mortgage term.

After clarifying your reasons for refinancing, you need to consider whether the timing and circumstances make this the right time to get a new mortgage.

Usually, you have to plan to be in the house for awhile for refinancing to make sense. Keep in mind, there will be no seller to cover your closing costs. You must have the money in an account or the equity in your home to cover those fees. When weighing whether to refinance, homeowners typically are urged to consider how many months of lower payments it will take to recoup the closing costs of the new mortgage.

For example, if your monthly payments go down by $156, it would take about 20 months of lower payments to recoup the average closing costs.

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