Knowing when to refinance may seem like a rather obvious detail at first glance.
The reality is far more complex and complicated than that. Simply refinancing to a lower rate may not be the best approach for your long-term financial situation. The first thing to look at about knowing when to refinance would be the reasoning behind it.
For what reason am I refinancing?
The most obvious reason is to shift to a lower interest rate. Rates may have come down and the homeowner could want to shift or consolidate their debt into the lower interest. Ideally, this should only ever be done once. There is nothing inherently wrong with wanting to secure a lower rate when paying back a loan; but there comes a point where it is not worthwhile.
The borrower will be paying closing costs to shift the loan which can easily off-set any gains that may be made for the foreseeable future. Lenders do not like to see borrowers that are constantly shifting around their debt on a credit report. A long-term relationship with a lender is a powerful component for building one's credit score.
Another popular reason to refinance is to extend the length of a loan. Many people end up refinancing to a 30 year mortgage to lower their monthly payments even though they will be paying more out on interest in the long-term.
When should you not refinance?
There are times when refinancing is not a good choice. If you are not intending to stay in your current home for very long, there is no reason to refinance it and it will look bad on your credit report. A borrower that is behind on their payments and trying to refinance is going to have a difficult time finding a lender because they will already view you as a risk. However, they may be government programs or incentives available to help out in this situation.
Be certain to understand what goes along with prematurely closing a mortgage out. Some companies may have stringent procedures or hefty fees for a premature closing. These fees should all be clearly outlined in the provided policy paperwork.
When do you want to refinance?
A refinancing should have a tangible benefit to the borrower. There are many good reasons to refinance a loan to a different rate and terms. Some people find it easier to make the lower monthly payment a long-term loan requires even though it will cost them more down the road. Others find it more prudent to switch between a fixed rate or adjustable rate mortgage depending on their circumstances.
Examine your options closely and understand your situation before making any major decisions. Try to limit your refinancing to only one time. When to refinance your loan will depend entirely on your own personal goals, motivations, and circumstances.