When to refinance your mortgage?

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Since interest rates are at a 40-year low, switching to a lower rate may save you a lot of money – possibly thousands of dollars per year. There are penalties for paying your mortgage loan out prior to renewal, however, these could be offset by the extra money you save through a refinance.

What's your goal? Before deciding whether or not to refinance, you need to determine what you want to accomplish. Remember, a refinance doesn't pay off the debt; it just restructures it, often at a lower interest rate and a different loan term than the current mortgage.

1- Reducing the interest expense is the most common goal of a refinance. But some homeowners also appreciate the ability to extend the loan back out to 30 years, reducing the monthly payment.

2- Debt consolidation is another goal of refinancing. If you have both a first mortgage and a home equity mortgage, combining the two mortgages into one fixed-rate mortgage levels out the payment over the loan term.

3- Getting cash from your home. The equity you have in your home can act like a savings account that you could access through a home equity loan or a cash-out refinance. This is usually done when you want to finance an important home improvement, pay for college or pay off high-interest credit card debt. Whatever your reason, this may be the right option for you.

When to refinance?
After determining your reasons for refinancing, you need to consider whether the timing and circumstances make this the right time to get a new mortgage.

You may be better off to stay with your current mortgage. For example, if your current mortgage has a high prepayment penalty or if you plan to move from your home in the next few years or when the monthly savings gained from lower monthly payments may not exceed the costs of refinancing.

As a rule of thumb, it pays to refinance if you can get an interest rate at least two percentage points lower than what you are currently paying. Asking yourself a few questions may help you determine if you can save money:

• How much can I lower my current monthly payment? 
• How long do I plan to stay in the house after I refinance?
• How much will I pay in refinancing costs? 

How to refinance?
Refinancing is similar to the process you encountered when you closed on your first mortgage. It requires an application, credit check, new survey, and title search, as well as an appraisal and inspection fees. As you know, this process can be quite lengthy and expensive.

Keep in mind, however, that by refinancing you may extend the time it will take to pay off your mortgage. That said, there are many ways to pay down your mortgage sooner to save you thousands of dollars. Most mortgage products, for instance, include prepayment privileges that enable you to pay up to 20% of the principal per  calendar year. This will also help reduce your amortization period (the length of your mortgage), which in turn saves you money.