When is the Best Time to Refinance Your Home Loan?

When should you consider refinancing? An old rule of thumb was to wait until mortgage rates dropped 2% below your existing rate. But while a drop in market interest rates is an important factor that may prompt a homeowner to refinance, there are many other circumstances that might make a new home loan worth considering. Rules of thumb aside, the best time for refinancing a mortgage depends as much on your individual circumstances as it does on prevailing market rates.

Refinancing When Individual Circumstances Change

What are some changes in your personal situation which might mean refinancing is step to seriously consider?

  • Your credit history has improved. The best mortgage rates and loan terms are typically reserved for borrowers with the best credit scores. If your credit score is much better than it was when you first got your home loan, it's possible that you can now get approval for a mortgage with a more favorable rate. Obtain a copy of your credit report now so you confirm your scores and correct any errors before applying.
  • Your income has increased, or your other debts have been paid off. If your income has recently increased or your non-mortgage debt--such as student loans, car loans, and credit card balances--has decreased, your debt-to-income ratio may have improved, and you may qualify for a lower interest rate for your mortgage.
  • Your home's value has risen. Although many home values have declined in recent years, if the value of your home has increased recently and you have greater home equity, you might consider refinancing your home to consolidate debt or make needed home improvements.
  • You decide you want the stability of a fixed-rate loan. Many homeowners received adjustable-rate mortgages (ARM) or interest-only (I/O) loans in recent years and may be facing increases in monthly mortgage payments. Refinancing a mortgage to a traditional 30-year fixed-rate mortgage can provide stability in payments that makes financial planning and budgeting far easier.

Refinancing When Interest Rates Drop

Of course, a drop in average mortgage rates remains one big reason why homeowners want to refinance. Even if you already have a 30-year fixed-rate loan, if current interest rates are substantially lower than what you pay on your existing home loan, refinancing your home could save a lot of money over time.

Most lenders don't like it when borrowers refinance too soon after getting a loan--typically within four years--because this suggests the borrower doesn't plan finances very well. However, when interest rates are extremely low, lenders may still consider a mortgage refinance even on fairly new loans.

Before refinancing your existing mortgage, make sure that you shop around for the best deal and compare interest rates, terms, and conditions. Your mortgage lender or mortgage broker can help calculate how long it will take to recoup the costs of a home refinance.

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