When Is the Right Time to Refinance My Mortgage?
There are many reasons why homeowners choose to refinance their mortgage. You can lower your interest rate, shorten the length of your mortgage, consolidate debt and lower your monthly payments. You can also do it to change an adjustable-rate mortgage to a fixed-rate mortgage. The key to success is refinancing at the right time. Here's a look at four of the best times to refinance as well as a few times when you shouldn't.
Interest Rates Drop
One of the main reasons why people often refinance their mortgages is because interest rates drop. Experts often suggest making sure you can secure a rate that is one to two percent lower than your original rate, and many say this is the best reason to refinance. If rates were higher when you initially got your mortgage, you could refinance and get a lower monthly payment, freeing up the cash in your budget for other expenditures. You can also refinance to pay your home off quicker than you originally planned so that you pay less interest in the long run. Refinancing when interest rates are low can also help you build more equity in your home at a faster rate.
Your Credit Score Rises
If interest rates aren't necessarily lower, but your credit score is higher than it was when you first got your mortgage, it can also be a good time to refinance. The higher your credit score, the better the interest rate the bank is willing to give you, especially if you have a score of 740 or higher. Even if your credit score hasn't changed much, take a look at your debt-to-income (DTI) ratio, or how much you pay toward debts each month compared to how much you make in income. Most lenders prefer that you have a DTI ratio of 36 percent or lower, although some may accept up to 43 percent. If that percentage drops significantly, you can often refinance for a lower rate.
You Aren't Moving Anytime Soon
If you think you'll move to a new home in the next few years, it's best to hold off on refinancing. However, if you think you're settled in for a while, refinancing may be a good idea. It can take a few years to make refinancing worth your while, and if you move before you break even, you're just wasting money. Think about your lifestyle. Are you planning on starting a family? Will you retire and downsize? Do you eventually want to look for a new job, potentially in a new city? All of these can impact your future plans for your home.
You Can Pay Off Your Loan Quicker
If you got a new job, received a promotion at work, inherited money or sold off some investments, you may have a sudden increase in income. One of your goals may be to pay off your mortgage as quickly as possible. If so, this may be a good time to refinance. Keep in mind that while you're renegotiating for a lower interest rate and shorter-term mortgage, your monthly payments will be higher, so make sure you can truly afford them.
The Worst Times to Refinance Your Mortgage
Just as there are good times to refinance your mortgage, there are also bad ones. For example, if you're focused on short-term savings in a nonemergency situation, refinancing probably isn't the way to go. If you're refinancing to pay off credit card debt, cover the cost of a renovation that won't add value to your home or to free up some cash to invest in the stock market, experts warn against making this kind of move.