De­ter­mine the best time to re­fi­nance a mort­gage

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Re­fi­nanc­ing a mort­gage is ad­van­ta­geous to home­own­ers for a va­ri­ety of rea­sons. The pri­mary rea­sons peo­ple re­fi­nance their mort­gages are to re­duce their monthly pay­ments or free up eq­uity to use to­ward home im­prove­ments or other ne­ces­si­ties. Lenders will fre­quently ad­ver­tise that “now”is the time to re­fi­nance, but peo­ple may want to get all of the facts be­fore mak­ing their de­ci­sions.

A low in­ter­est rate is not rea­son alone to re­fi­nance. Con­ven­tional wis­dom has long sug­gested that bor­row­ers wait to re­fi­nance un­til in­ter­est rates drop 2 per­cent be­low their cur­rent rate. While a low in­ter­est rate is im­por­tant, there are sev­eral other fac­tors to con­sider.

• Clos­ing costs: Re­fi­nanc­ing a home is an ex­pen­sive un­der­tak­ing. While it can ef­fec­tively shave $100 or more off your monthly pay­ments, there is a fi­nan­cial out­lay dur­ing the process, which in­cludes clos­ing costs. A per­son can ex­pect to pay any­where from 2 to 5 per­cent of the loan’s value in clos­ing costs when re­fi­nanc­ing. Lenders used to en­able some to roll the cost of the clos­ing into the mort­gage, but strin­gent rules have changed the way many banks now do busi­ness. If the fi­nances are sim­ply not there to cover the clos­ing costs, re­fi­nanc­ing may not be an op­tion.

• Credit rat­ing: If your credit rat­ing is bet­ter now than it was when you ini­tially earned your home loan, then this might be a good time to re­fi­nance. Not only will a per­son bene- fit from a low mar­ket rate, the in­ter­est rate may be even lower be­cause lenders look more fondly on you now than they did years ago. Lenders of­ten base their as­sess­ments of bor­rower re­li­a­bil­ity and sta­bil­ity on those po­ten­tial bor­row­ers’ credit scores, so a strong credit score makes you look bet­ter in the eyes of lenders. Bor­row­ers with poor credit rat­ings may not ben­e­fit from re­fi­nanc­ing.

• In­come: Aper­son’s debt-to-in­come ra­tio is another fac­tor in de­ter­min­ing mort­gage in­ter- est rates and ap­proval. A pos­i­tive change in in­come sta­tus as well as re­duc­tion in debt could make it a good time to re­fi­nance.

• Ad­justable rate mort­gages: Many peo­ple opted for ad­justable rate mort­gages when buy­ing homes years ago. Over time, their monthly pay­ments may have in­creased con­sid­er­ably, mak­ing it nearly im­pos­si­ble to af­ford a home. Re­fi­nanc­ing for a fixed-rate mort­gage, re­gard­less of the cur­rent in­ter­est rate, will likely ease some of your fi­nan­cial bur­den.

• Home value: A higher home value means more eq­uity in the home. This money can be used to pay down debt or for home im­prove­ments that fur­ther im­prove the value of the home and prop­erty. It is im­por­tant to speak with a real es­tate pro­fes­sional to de­ter­mine if home val­ues have spiked in a par­tic­u­lar neigh­bor­hood and to gain an ac­cu­rate ap­praisal of the home. This will help de­ter­mine if re­fi­nanc­ing is fru­gal.

• In­ter­est rates: Lower in­ter­est rates of­ten mo­ti­vate home­own­ers to re­fi­nance, as a lower in­ter­est rate can save home­own­ers a sub­stan­tial amount of money over the course of their loans. How­ever, re­fi­nanc­ing too soon (within 4 years of the orig­i­nal home loan) may put home­own­ers in a neg­a­tive light. Lenders may see bor­row­ers who re­fi­nance too soon or too fre­quently as risky bor­row­ers who can­not suc­cess­fully man­age their money.

• Pre­pay­ment penal­ties: Cer­tain mort­gages have pre­pay­ment penal­ties built in. Should a per­son pay off the mort­gage too early, usu­ally within two to five years, 2 to 4 per­cent of the home’s loan value must be paid out. Re­fi­nanc­ing counts as pay­ing off one loan and open­ing up another. Penal­ties could de­ter a per­son from re­fi­nanc­ing too soon.

De­ter­min­ing the best time to re­fi­nance your home mort­gage takes ef­fort on the part of the bor­rower and in­for­ma­tion about mar­ket trends. By do­ing one’s home­work and be­ing aware of cer­tain fac­tors, a per­son can save money by re­fi­nanc­ing a home loan.

METRO SER­VICES PHOTO

In­ter­est rates are not the only fac­tor home­own­ers must con­sider when de­cid­ing whether or not to re­fi­nance their mort­gages.

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