When to Refinance Your Mortgage

When you are refinancing a mortgage, doing so at a lower rate isn’t always the right decision. It can benefit you to sit back and put some time and thought into your decision.

Refinancing your mortgage multiple times can help reduce your financial benefit overall. Those who refinance, looking for the next low mortgage, often usually end up paying a hefty price by leaving a trail of closing costs.

There are only some circumstances when refinancing your mortgage makes sense. Sometimes it may be more practical to keep your current loan.

When to Refinance

Making sure the timing and circumstances make sense before refinancing your mortgage is a must. It’s common to be in the house for awhile before the decision to refinance makes sense.

According to Bankrate's 2012 closing cost survey, the national average for closing costs on a $200,000 loan was $3,754. The fees in this survey didn’t include taxes, insurance or prepaid items.

Homeowners, when deciding whether to refinance, typically are advised to consider how many months of lower payments it will take to recover the closing costs of the new mortgage.

While this isn’t the worst advice to follow, it doesn’t really help measure your savings. Savings are a result of a lower interest expense, not lower monthly mortgage payments.

You'll find that if you get a lower interest rate but extend the mortgage term, you might end up spending more in interest. For example, replacing a mortgage that has 20 years remaining with a 30-year mortgage will result in a higher interest expense over the life of the new loan.

There are two calculations to consider when trying to figure out whether refinancing with a loan term extension will help you save: First is where the new loan has the same term as the old loan, and second where the new loan is the length of your planned refinance. Compare the interest savings to see if refinancing helps reach your financial goal.

A majority of people refinance their monthly mortgage to make their payments more affordable. A longer loan term or a lower interest rate both work towards lowering the monthly payment. Affordability could be a motivator as long as homeowners understand they might not be minimizing their total interest expense.

Although short-term savings are important, they aren’t the only factor to consider when refinancing. Refinancing in order to get out of an adjustable rate mortgage (ARM), a piggyback mortgage, an interest only mortgage or other mortgage provisions are reason enough to take on refinancing a mortgage.

Homeowners with ARM’s, in some cases, would be fine staying with their loans, especially in they do not plan on being in the loan long term or if the reset rate on their mortgage isn’t financially threatening.