When Is It Right to Refinance Your Home?
When you refinance your mortgage loan to one with lower interest rates, you can save a significant amount of money each month. Depending on how large your mortgage loan is, and how big of a rate drop you nab, a mortgage refinance can save you more than $100 a month. However, there are times when a refinance doesn't make sense or won't really save you much.
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Low Enough Rates
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Refinancing isn't free. It's not inexpensive, either. You can generally count on paying from 3 percent to 6 percent of your principal balance in closing costs when you refinance your mortgage loan. This means that you'll need to nab a low enough interest rate to allow you to quickly cover these costs. There is no hard-and-fast rule here. In general, though, it makes the most financial sense to only refinance when your monthly mortgage savings will allow you to pay back your closing costs in three years or less.
Staying in Your Home
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It makes sense to refinance if you're planning on living in your house for five years or more. Again, it can cost thousands of dollars to refinance your mortgage loan. If the odds are good that you'll be moving from your home in two years, you might not live in your home long enough to cover those closing costs with the monthly savings that a refinance brings. Make sure before refinancing that you'll benefit from the cost savings. Otherwise you'll just be wasting your time and money.
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Credit Score
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If you have a low credit score -- anything under 720 on the popular FICO credit-scoring system -- it might not make financial sense to refinance. Lenders rely on this three-digit number to set the interest rates you'll receive on a new mortgage loan. If your credit score is too low, your lender won't reward you with the lowest possible rates. This will significantly cut into the savings that a refinance would bring. If your lender can't offer you a low interest rate, you might not realize enough monthly savings to pay back your refinance closing costs in a timely manner.
Delinquency
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If you're struggling with your finances, and you've missed a mortgage payment, you're not likely to nab a refinance. That's because lenders -- whether you're working with your existing lender or you're calling others -- don't want to work with borrowers who have a history of missing their payments. If you've fallen behind on your monthly mortgage payments, rather than seeking a refinance, call your existing mortgage lender and ask for help. Your lender might be able to modify your home loan so that your monthly payment is lower.
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