Decisions about mortgages tend to be a big deal, which is not surprising considering that they are the largest financial transactions that most of us will ever undertake. Revisiting this large and momentous transaction is not always an obvious move, as the stress and paperwork involved might not be worthwhile. And yet, depending on the both macroeconomics and your personal situation, refinancing your mortgage could save you money. So, how can you know when the time is right to refinance your mortgage?
There are a number of criteria to look at when deciding whether or not it makes sense to refinance your mortgage, such as your income, credit score, and the interest rates in the market. These considerations can help you to determine if the time is indeed right for you.
What Does it Mean to Refinance Your Mortgage?
Before getting into the nitty-gritty of whether it makes sense for you, it is important to understand what it means to refinance your mortgage.
In essence, refinancing your mortgage means replacing your existing mortgage with a new loan. This can either be from a new lender or your existing one.
Refinancing your mortgage might enable you to decrease your monthly payments, the overall cost of the loan, or sometimes even both. However, refinancing your mortgage is not free of charge. The charges and fees involved usually range between 2-6% of the cost of the loan, so be prepared to pay a not- insignificant amount in order to proceed down this path.
Has Your Financial Situation Changed?
The first set of factors to consider involve your personal finances.
Mortgages are usually multidecade loans, and it is therefore not surprising that your personal finances could have changed in the time since you signed the initial paperwork. These changes could have occurred on two principle levels:
(1) Your income: Your monthly income could have changed (hopefully, it has increased) as the years have passed. You may find yourself with more money at the end of every month, funds that you can now use to increase your ability to save, invest in the markets, or pay off your debts. This could be a good reason to try and shorten the term of your loan, saving on interest payments during the life of your mortgage.
(2) Your credit score: The terms of your loans are contingent on your credit score. Those with higher scores are seen as being more reliable payers, and therefore have a better chance of receiving cheaper financing. If your credit score has improved dramatically, you may find yourself in a position to negotiate better terms for a new mortgage.
Improvements with both of these factors have the potential to make it worthwhile for you to refinance your mortgage loan, either by paying off your obligations sooner or by finding cheaper borrowing options.
Has the Macroeconomic Environment Changed?
The second set of considerations involve the overall economic environment.
While you have significantly less control of the macroeconomic environment than your personal situation, it is important to be aware of overall interest rates and how this could impact the financing available.
The Federal Reserve Board of Governors decides to raise, maintain, or lower interest rates depending on a number of different data points in the market. Their mandate is two-fold: maintain price stability (i.e. keep inflation under control) and maximize employment.
The interest rates that the Fed sets will impact the financing that banks will offer their clients. If the interest rates are now lower than when you initially secured your mortgage loan, it might make sense to explore if you could save money by renegotiating a new arrangement.
The distinction between fixed- and adjustable-rate mortgages (ARM) throws another factor into this calculus. Though fixed-rate mortgages never change, ARM’s tend to start at a lower fixed rate and then adjust with the market over time. If the lower fixed-rate portion of your loan is set to expire, you may have more of an incentive to explore refinancing options before the reset takes place.
Conclusion: To Refinance or Not to Refinance
The decision to refinance will depend on developments in your own household and across the larger economy. At the end of the day, the only way to truly know if now is the right time to refinance is whether or not doing so can help you lower your debt obligations.
Sometimes, the only way to truly understand if the time has come to refinance or not comes down to crunching the numbers and discovering if the money you will save is worth the hassle involved.
Using the TipRanks’ mortgage calculator, you can experiment with a number of different parameters such as balance, interest rate, and duration. This can help you to learn how the various options will impact your personal finances.
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