When Should I Refinance My Home Mortgage?

Current mortgage interests are at very low levels and many are thinking of refinancing their homes. There is no crystal ball that will tell you where interest rates will be in six months or a year. However, the length of time which interest rates have been this low is historical level. Chances are on the side that interest rates will gradually rise in the future, but when no one is certain despite the continued weakness in the housing market. So now may be a good time to start considering refinancing one home specially if you have any variation of adjustable type debt that is set to reset sometime in the near future.

Some points that you should consider when thinking about refinancing are as follows.

• Current Mortgage rates – Are they at least 1% point less than your existing mortgage? This is the point at which it starts to make sense, 2%, or more than you should definitely consider refinancing.

• Type of Loan – If you have and adjustable rate mortgage which is due to reset it’s a great time to consider refinancing given the low interest rate environment. This will give you the opportunity to roll into a fixed rate mortgage so you will not have to worry about increasing mortgage payments in the future.

• Equity – If you have at least 20% equity in your home, then refinancing will allow you to eliminate Private Mortgage Insurance (PMI). Eliminating this insurance can possibly save you anywhere from $70 to $150 a month.

• Credit Score – If your debt to income ratio is reaching the maximum. Then refinancing could potentially increase your credit score by freeing up income and lowering the monthly payment requirements. Lowering your debt to income ratio will help improve your credit.

• How long have you been in your home? The longer you have been in your home the less sense it makes to refinance since your monthly payment is now being applied more to principal then interest.

• If you are facing a one time large expense such as college tuition, medical bills, or something of that nature. The refinancing and pulling some cash from your equity might make sense. Borrowing these from other sources usually proves to be more costly due to interest rate differentials.

You must also consider refinance cost, if any, in order to determine whether refinancing makes sense for you. Take the time or get professional advice to evaluate if refinancing makes sense in your case and carefully evaluate cost savings.1

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