When Is the Right Time to Refinance a Mortgage

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By Dzhingarov

For several years, there has been a surge in refinancing due to mortgage rates that have been considerably low. For the past year, mortgage rates have even been reaching new historical records. For homeowners, this has been a winning situation that has led many to recognize a significant amount of savings. Since the act of refinancing can be a time consuming and sometimes stressful venture, many homeowners want to know when is the right time to refinance a mortgage.


There are many advantages to refinancing when mortgage rates are low, especially if the current interest rate on the loan is high. By refinancing, the monthly mortgage payment will be lower which is the most common reason for obtaining a refinance. In some cases, low mortgage rates have made it possible for homeowners to refinance to shorter term loans that also offer lower rates than longer term loans. When choosing a shorter term loan, the result can be a monthly mortgage payment that is similar to the existing longer term loan or even a slightly lower mortgage payment. The significance of a shorter term loan is that the overall interest over the life of the loan will be much less and the mortgage will be paid off in a much shorter period of time. With a shorter term loan, a homeowner’s equity position in the home increases at a quicker pace thus leading the homeowner to own the home free of a mortgage in less time.


Some homeowners who have owned their home and have been paying a mortgage for a longer period of time, will usually have equity already built up in the property. These homeowners may have the option to take some of this equity out in cash to be used for other things, such as debt consolidation, home remodels or maintenance, education, or other expenses. Some may even take cash out in order to invest the money in other areas as part of a financial planning strategy. For many homeowners, this option has provided them with a cash flow that does not negatively hurt their personal finances because the refinance was done with a lower rate.

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To determine if it is the right time to refinance, a homeowner must first look at the existing mortgage to see if there is a prepayment penalty. In the case of a penalty, the homeowner must then determine if the penalty fee is higher or lower than the savings that will be recognized by refinancing. In today’s market that offers low and competitive mortgage rates, the amount of savings can often be above the penalty fee which has sent many homeowners to move forward with the refinance.


Despite any advantages or disadvantages that are presented with refinancing, it is clearly a financial move that must be considered and taken seriously by the homeowner. Since every mortgage is unique to the person involved, every refinance will also be unique to the homeowner’s personal situation.