Mortgage Refinancing: When is the Best Time to Do It?

Hand On CalculatorFor the last few months, the mortgage industry has gone through some drastic changes. If you're currently on a home loan program and you're highly considering refinancing, it's important to know what are the opportunities ahead and how can you possibly capitalize on them. 

Here are some rules to keep in mind to know when and how should you refinance:

Secure a Low-Interest Rate

Historically, there's a rule of thumb that states that if you can reduce the interest rate by 2% or more, then it's a good reason to refinance. However, in today's standing 1% cut down is an enough incentive for you to push through with refinancing.

Lowering the interest rate does not only give you greater savings, it is also a good way to increase and build equity in your home. It reflects on your monthly repayments.

Stay Away from Same-Length Plans

After fulfilling five years of ownership, it's not smart to refinance a long-term mortgage with the same-length plan even if you'll get savings on the rate reduction. This is because instead of reducing the cost, you're simply resetting the life of your loan. As much as possible, choose a refinancing program which is shorter by half as compared to your original loan.

Leverage Your Financial Standing

Another important thing to note is your financial situation. It's only ideal to consider a shorter loan term if there's an improvement to your financial cash flow. It could be that the mortgage refinance rate in Utah may be lower, but can you handle the monthly repayments with your current income plus your monthly expenses? You can't simply decide on this thing without fully considering the effect of your choice in the long run.

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Know When to Pay for the Recoup Costs

As refinancing always comes with closing fees, it's easy to determine when exactly you can recoup those costs. For example, you've spent a total of $2,500 in closing costs and your new mortgage gives about $125 savings per month. It'll take you 20 months or almost two years before you can start saving. This is essential to know, especially if you have plans on selling your property. It'll be a total waste of investment if you sell when you're still recouping from the costs.

Refinancing is a great financial move if it lessens your mortgage payment, shortens your loan term or allows you to increase and build equity more quickly. When you know how to use it wisely, it can also become a valuable tool to get your debt under control. Know the pros and cons first before you make a decision.