When is the right time to refinance?

When is the right time to refinance?


Refinancing your mortgage should save you money, one way or another. When you refinance your home loan, you essentially swap it for another one with different repayment terms. You might assume that the new terms of your refinanced mortgage depend on timing and the behavior of the overall market. But finding the right time to refinance depends more on your own financial situation, rather than the unpredictable trends of the broader economy.

Dive deeper than just chasing lower rates

Many people start to consider refinancing when interest rates are low. Since most mortgage borrowers use a standard 30-year fixed-rate loan to buy a house, the interest rate they signed onto at the outset is the one they will be paying until that balance is clear. But average interest rates on this type of mortgage fluctuate considerably over time.

For example, according to historical interest rate data collected by Freddie Mac, the average mortgage applicant in August 2008 could expect to be approved for a 30-year loan with a fixed interest rate of 6.4% . Since then, average rates for the same type of mortgage have gone as low as 3.4% in 2013, and today hover around 4.5%. Or, if we look at data much further in the past – prior to the 2000s – we see that average rates sometimes eclipsed 10%.

Therefore, it’s easy to speculate that someone who applied for a fixed-rate mortgage in 2008 might benefit from refinancing now. However, timing your own refinance based on how the interest rate market will perform is not a wise strategy. It’s also not the only reason why many homeowners choose to refinance their mortgage. The bulk of the reasons why you might look into refinancing are aligned with your financial priorities. For example, refinancing is often a sound decision if:

  • The value of your home has increased since you opened your mortgage.
  • Your credit score has improved since you applied for a loan.
  • You signed onto an adjustable-rate mortgage (ARM) but can save by refinancing to a fixed-rate loan, or vice-versa.
  • You want to shorten the term of your mortgage and pay off debt faster.

Understand all your options

Each of these refinancing goals are different, but the way to achieve them is the same. Calculate the break-even point on a new mortgage, or the point at which the refinanced loan will begin paying for itself after accounting for closing costs. For example, assume a refinanced mortgage could save $200 per month, but charges $2,500 up front in closing costs. Dividing the closing costs by the monthly savings tells us that it will take 12 months for the refinance to start saving money compared to the previous loan. These numbers are just an example and will vary based on your individual circumstances.

No matter your ultimate goal in refinancing, these fees will factor into the amount you end up saving compared to the previous loan. Work closely with First Centennial Mortgage to ensure you understand all the options on the table, and get a breakdown of the fees involved. That should result in a clear path forward as you continue to pay off your home under a new loan.

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