When to Refinance: Answering “When Should I Refinance?”


When to Refinance Your Home Mortgage?

Choosing when to refinance is sometimes easy.  When rates drop precipitously and it is very clear that you could save a lot with few closing costs and without adding a lot of years onto the end of what you already owe, the answer to the question “when should I refinance my mortgage?” requires little thought.  But what about more nuanced times, when it still may be a favorable decision but it is not quite as clear.  Please keep in mind that your individual decision with regard to taxes and other aspects of your financial situation may need to guide your decision – we provide a general guide to when to refinance but you should check with your own financial adviser before deciding whether to refi in the first place.

Overall, it is often not possible to know exactly when to refinance your home.  The exact perfect timing is something that nobody could know or many people would be quite rich – it would be like being able to accurately time the stock market.   So with a mortgage loan answering the question “when should I refinance my home?” often means knowing when conditions are more favorable than usual, even if your timing might not be absolutely perfect.  In other words, knowing when to refinance means assessing that at the current point mortgage rates have more upside potential than downside potential in the short and medium term, instead of meaning that you need to assess whether rates are at their absolute bottom.   And then again, knowing when to refinance your mortgage may go much deeper than just where rates are, as you will see below.

When to Refinance Right Now

Here are some situations where the answer is “yes” as far as the question “when should I refinance my mortgage?”:

1. You will save a lot more in interest, after taxes, than you will pay in costs.  In other words, take what your yearly savings will be with your new rate and multiply that by the minimum number of years you are likely to stay in your home.  If that is greater than the fees you will pay, then the answer to the question of when to refinance is easy.  The greater this savings will be, the better, because you have to account for the fact that that money would earn interest if not spent on a refi loan.  Make to accurately assess how long you will likely be in your current home and be conservative with that estimate.  One mistake people sometimes make when deciding when to refinance is paying high fees and assuming they will recoup them over the time of a long mortgage, even though they may actually move at some point sooner.

2. If you are doing a cash out refi for expenses you would otherwise have to take out a different kind of loan with higher interest.  In this case your after-tax savings by using the likely lower home mortgage interest rate may be significantly greater than any difference in costs between the two types of loans.  In other words, you would do the following calculation if you are considering when to refinance to take cash out – or more accurately whether to refinance to take cash out or just take out a different type of loan altogether:

A. Yearly interest on new loan + fees for new loan

vs.

B. Yearly interest after taxes on cash out mortgage + fees for new mortgage

3. You need a longer term.  You may need a longer term this for two reasons.  First you may want a longer term on a practical level, looking at your financial plans and obligations, a longer term mortgage with lower payments just may be a better fit.  Second, and related, you may need lower payments right now and the only way to do this is to stretch the home mortgage for a longer period and therein lower your payments.  Knowing when to refinance into a longer loan means assessing your financial situation and deciding whether the likely higher interest rate is worth it.

4. You have an adjustable rate mortgage and you are concerned about where rates are headed.  You may still have a favorable home mortgage interest rate, but you need to look at the future and wonder what the average rate will be over the course of your entire loan.  It’s impossible to predict of course, but if you are concerned that the average rate you will pay on your adjustable will be greater than the current rates you can get on a fixed rate mortgage, it may be time to refi for peace of mind.  Knowing when to refinance out of an adjustable rate loan can be difficulty at times when rates are low, but as they begin to rise it may become quite worthwhile.

5. You have a chance at some favorable terms.  This is less common but perhaps you find a lender willing to give you an assumable mortgage product and rates are favorable.  You know you may sell your home in the future at a time when rates may be higher, and being able to let the buyer assume your home mortgage refinance rate could help you sell your home.  This kind of favorable term opportunity may motivate you when you are thinking of when to refinance, as long as the change in rates is minimal or nonexistent.  Usually a change in terms, besides the length of the mortgage, is not by itself a reason to refi then, but it can be a factor in the decision

6. You have a second mortgage and can consolidate.  It may be that your primary mortgage has the same interest rate as going home mortgage interest rates, but perhaps you have a second mortgage with a much higher rate.  When you take the weighted average between the two it may be high enough to prompt you to refi, as long as you take the fees into consideration.  Knowing when to refinance and consolidate mortgages may actually be the easiest question to answer.

The News and When To Refinance

Sometimes there is a relationship between when to refinance your home and outside news.  For example, a few years’ back the federal government is shut down because the political parties could not agree on measure to continue to fund operations.  The question for us here is whether something like that moves the needle at all as far as the question, “When should I refinance my mortgage?”  And of course the answer closely relates to whether news like this will lead to lower mortgage rates.  When to refinance your home is almost always connected most closely to rates.  So do home refinance rates move because of this kind of news?  The short answer is that they will likely not move as a direct result of something like a government shutdown that is likely to be over quickly.  However, closer look at the longer-term impact of news like this may reveal a more complicated picture.  In this case:

First, if the Fed and those in the bond market feel like this shutdown is a symptom of how badly the two political parties are getting along, and if there is a feeling that these differences could have significant and lasting effects in other ways on economic growth, then there may be temptation to keep bond rates low in anticipation of economic weakness.  For example, perhaps the Fed would feel that a strong economic recovery requires the two parties to work together and make decisions that are not biased by the need to harm the other party.  If this does not exist, maybe the chances of economic recovery are dampened, the Fed stays in play, and mortgage rates stay low.

Second, if the federal government shutdown lasts for a little while and the direct effects of it being mostly closed affect the general economy, then the Fed once again will be tempted to continue keeping mortgage interest rates low.  For example, the number of people who work for the government is high and those people will begin to see their incomes affected, meaning that that group will spend less.  And companies who get some sort of federal aid and assistance may see interruptions in this important funding.  And finally, the direct effects of federal government jobs on economic productivity will obviously be felt.  All of this could reduce the speed of our recovery and therein lower mortgage rates and affect the question “When should I refinance my home?”.

Answering “When Should I Refinance My Mortgage?”

As you can see from the above, the answer to when to refinance can be complicated, and to make things even more complex there may be counterbalancing issues related to the above list.  For example, just because you can get favorable terms on a new loan, that may not be the best guide as far as when to refinance.  Keep in mind that the time you will spend on the rei is valuable in itself, and the favorable terms may not really have much impact long-term.  Also, while consolidating two mortgages may seem like a good idea, there may be tax advantages or other reasons why having two is preferable.  Make sure when deciding when to refinance you play out the changes into the future, and keep any potential changes in your financial situation in mind.

When should I refinance?

Finally, we do want to mention that while in a large majority of cases getting a lower rate is perhaps the most important reason to refinance, there are times when it is a good idea even when rates are higher.  In most cases this is because the alternative for your entire financial picture is more expensive, and this usually happens when ou are considering a refinance with cash back for a particular purpose.   Mitigating the costs of the higher rate may be that you will get more back in taxes for that new higher interest being charged, and that needs to go into your overall calculation.  There are also less common reasons you’d refi into a loan with higher rates, such as the availability of an assumable mortgage that would allow you to pass on your favorable mortgage rate to a buyer in the future when rates have risen even more.

As we’ve said before, you should always check with someone who knows your own unique financial situation before choosing when to refinance, especially if the choice is not obvious or your situation is complicated.

Researching “When Should I Refinance my Home?”

We hope to provide you with the information and advice you need to know when to refinance your home mortgage.  There are other resources you can also use, including:

  • Forums where mortgage brokers respond to specific questions and concerns.  The best ones are those where the brokers that respond may be able to give out their contact information but are not allowed to actively solicit.  This way you can be sure they are giving unbiased information.
  • Other websites like ours that are unbiased and independent, such as this page at Zillow that provides an easy mortgage calculator to better understand your savings
  • Talk to friends and neighbors who have refinanced and can recommend a good broker and bank
  • Talk to your current bank, both the one that has your mortgage and the one that you might refinance with.  Knowing when to refinance is one thing, but being able to move quickly when it is time is also important

Here is a short article about when to refinance from the independent and trusted site “Investopedia”.  Here is another trusted resource, Bankrate, that answers the question “When Should I Refinance“.

When to Refinance Again

Now that you’ve read about when to refinance your home mortgage, it makes sense to wonder when should I refinance again.  Perhaps the simple answer to when you should refinance after your original refinance is as soon as you can get a favorable rate or when consolidation of other debts makes sense. That is, in fact, an accurate answer to the question of when to refinance again (and again and again). There is no penalty to your credit scores, for example, if you refinance over and over, and there can even be a benefit if you lower your overall obligation. But there may be some subtle issues that guide when to refinance again.

  1. First, consider how much you will actually save by refinancing your home again. After some tax savings you may find that the effort involved – now that you’ve done it before you know how much time and effort it takes – is not worth it. That may be particularly true if you are either nearing the end of your mortgage term or nearing the time when you will move out of your home.
  2. Second, consider how happy you are with your current mortgage provider. Are you getting excellent customer service, and maybe even a perk or two if you do other business with them as well? D you want to chance the possibility that a new bank will not be as easy to work with? While usually not a significant consideration, when people are thinking of when to refinance and its a close call, this can be a significant factor.
  3. Third, if you are deciding when to refinance you may actually be motivated to do so if your circumstances are about to change in a way that will make your next refinance more difficult. If you are soon going to change jobs, for example, it may be best to refinance your home now, before the banks have a problem with you being only at your new job for a short time. This also holds true for when you are going to take on a new substantial debt – of course make sure you will be able to meet all your obligations – but in this case the mortgage company may worry about your bet to income ratio.
  4. Finally, keep in mind the short-term effects of the loss of money you might have for any fees involved or the prepaid expenses. This is usually a small or even insignificant factor, but in some isolated cases it can be important. For example, if you have an upcoming home improvement that cannot be avoided, and you cannot do a mortgage with cash out, you may want to wait to refinance despite slightly lower rates if it will mean that you have to take out a personal loan with high interest or run up a credit card bill you will only pay the minimum on. Or perhaps you have another debt that you could otherwise pay off with hat extra money and instead it will now sit with high interest for a while.

These are some reasons why you might or might not refinance your home again soon after you close. There are other reasons you might answer yes to the question “when should I refinance my mortgage – again?”, and this is by no means an exhaustive listing. The bottom line is that refinancing again follows basically the same pattern as when to refinance the first time around, with some very small caveats that may affect a few potential homeowners. In all, make sure you have a mortgage that allows you to refinance right after you close, since there are still some loans out there that have a period of time within which you might not be able to.

We hope this page helped you answering the question “When should I refinance my mortgage?“, and we also hope you might share your own experiences and advice about when to refinance below.