Small house sitting next to an alarm clock to represent good timing for home refinancing

When to Refinance Your Home Mortgage

Refinancing your home mortgage is a major financial decision. However, it's also one that has the potential to save you thousands of dollars over the life of your loan.

Refinancing your mortgage can help you to pay less every month or even save your home if you can't afford your current payments. It can also help you pay off your mortgage loan at a faster rate.

A Good Time to Refinance

The general advice given by most financial advisors is to refinance your home when you a rate can be obtained that is at least one percentage point below your current rate. Depending on the amount of your mortgage, this one point difference in your home refinance rate can save you hundreds of dollars every month. Even people with small mortgages are likely to save almost $100. That's a significant enough savings to make it worth the hassle of going through a refinance. Of course, the problem with this advice is that it's too general. Thought it only makes sense to refinance when rates are significantly lower than what you are currently paying, it is also important to consider some other factors.

Important Considerations

Start by thinking about how long you want to own your current home. Typically, refinancing a mortgage comes with thousands of dollars in fees. In order to save more money with a lower interest rate than you would pay in fees, most people have to make payments for at least two years. That means if you plan on selling your house in under two years, it probably doesn't make sense to refinance.

On the other hand, if you know you're going to be living in or renting out the property for a long time, refinancing as soon as possible is probably a good decision. Next, think about your current financial situation. Too many people use refinancing as a way to pull equity out of their home to spend as cash. Refinancing should not be used as a way to obtain low-interest cash unless there is a real need for the money. Think of pulling out money as a last-resort emergency fund, not as a piggy bank for a new swimming pool.

Words of Caution

At the same time, if you truly need the money, be careful about using home refinancing to obtain it. If you have little or no equity in your home, refinancing your mortgage is going to be very difficult. It may even be impossible. Furthermore, you need to be careful to make sure that you are actually saving money when you refinance. The best reason to refinance is to take advantage of a lower interest rate. If you need money for bills or other living expenses, make sure that the new interest rate isn't higher.

Last Updated: January 10, 2018