When Does it Make Sense to Refinance My Mortgage?

When does it make sense for me to refinance my mortgage loan? That’s the question I’d like to talk to you about today. This is something a lot of homeowners are thinking about right now, mainly because they’ve heard how low interest rates are today.

While it’s true that interest rates on mortgages are the lowest we’ve seen for a while, that doesn’t mean that everybody is going to qualify for those low rates. In fact, many people won’t even qualify for refinancing. So the first thing you need to do if you’re thinking about refinancing in the near future is figure out if you’re a good candidate. Here’s how to go about it.

When is Refinancing a Good Idea?

So, when does it make sense to refinance your home loan? Basically, if you can save more money over the life of your new loan than what you spend in closing costs to acquire that loan, then it might be a good time to refinance. So you’ve got some mathematical homework to do before you can figure out if refinancing makes sense in your situation.

The first piece of the puzzle you need to figure out is the current value of your home. Notice that I use the word current, which is the key to this whole puzzle. As you know, home values have dropped in most cities across the United States. Over the last few months, since our economic recession came to pass, home values have dropped quite a bit. Now, this doesn’t mean that home values have dropped in your area. It just means that on the whole, nationwide, home values have dropped. This creates an obstacle for a lot of homeowners, because you can’t refinance your home if you owe more on the mortgage than the home is currently worth — not without government insurance, at least.

So before you go further in this process, you should figure out how much your home is worth in the current market. You could do this in several ways. You can use one of the home value websites that are online today, or you can have the home appraised by a professional appraiser. The second option is the best way to figure out what your home is worth, because a home appraiser can take everything into account. He will look at recent sales in your area, and then he’ll compare this against the size and condition of your own home, any upgrades you’ve made, etc.

You also need to figure out how much you currently owe on your mortgage loan. This is needed to determine how much equity you have in the home. Most mortgage lenders today will require you to have at least 20% equity in order to refinance. Yes, there are certain government programs right now that allow you to refinance with less than 20% equity — such as the government’s Making Home Affordable program — but in most other cases, you’re going to need positive equity.

To determine the amount of equity you have in your home, you would subtract the loan balance from the home’s current value. If the current balance due is greater than the home value (you owe more than the home is worth), then you are upside down in the mortgage. If this is the case, it becomes a lot harder to refinance a home. In fact, your only option is probably to use the government’s mortgage assistance program, mentioned previously.

When Does the Refi Benefit the Homeowner?

So let’s say you do the math, and you figure out that you do have some good equity in the home. Does this mean it’s a good time for you to refinance your mortgage? That depends. You’ll still need a good credit score and a good debt-to-income ratio in order to refinance, in most cases anyway. More importantly, a mortgage refinance must work out so that you save more money in the long run than what you pay in closing costs. Remember when you first bought the home and you had to pay closing costs on the mortgage? You’ll have to pay those costs again when you refinance the loan.

This is where a refinance calculator becomes useful. Once you start talking to lenders and getting quotes for refinance loans, you can run the numbers through a refinance calculator to see if the refi works out in your favor. Remember, refinancing doesn’t always make sense. In some cases, the closing costs would exceed the amount that the homeowner saves over the course of the new loan.

This is known as the “break-even point”. It’s the point at which a mortgage refi begins to benefit the homeowner. If you do all this research and get refinancing quotes for mortgage lenders, and you find out that you can end up paying more for the loan than what you save over the life of the new loan, then it’s not a good time for you to refinance.

When should I refinance my mortgage loan? It’s a common question among homeowners, especially at times when mortgage rates are low like they are now. I hope this article gives you a better understanding of how the process works and how to decide if it’s the right time for you to refinance.