Is It Time to Refinance?

Over time, mortgage rates often fluctuate. Depending on where rates currently stand, now may or may not be a good time for homeowners to consider refinancing their mortgage. How can you determine whether it makes sense at any given point to refinance your mortgage?

In the past, one rule of thumb was if the current interest rate was 2% lower than the rate you were paying on your existing mortgage, it made sense to refinance. Today, that general rule may still hold true in some cases. However, even if the current rate is less than 2% lower than your existing rate, refinancing may still be appropriate.

Of course, a lower interest rate is not the only reason to refinance. Here is a review of several reasons why refinancing might make sense for you:

To Move from an Adjustable Rate to a Fixed Rate Mortgage. Many first-time homebuyers may have no choice but to go with an adjustable rate mortgage (ARM) because they cannot qualify for a fixed rate loan. If that was the case for you, perhaps your ARM is about to go up. If so, you may be able to “lock in” a lower rate by refinancing with a fixed rate mortgage.

To Build Equity at a Faster Rate. Perhaps you would like to pay off your mortgage in less than the traditional 30 years. A drop in interest rates may allow you to refinance your 30-year mortgage and replace it with a 20- or 15-year mortgage at a monthly payment that may be close to what you have been paying. This option may be especially attractive to homeowners who are nearing retirement and would like to pay off their mortgages before that time.

To Replace a Jumbo Mortgage with a Conventional One. The threshold for a jumbo mortgage has steadily increased in the last few years to its current level of $417,000 (and 50% higher in Alaska, Hawaii, and the U.S. Virgin Islands). The difference between a jumbo and a conventional mortgage can be significant—usually ⅜ of a point or more. If you have a jumbo mortgage, you may be able to refinance and pay down enough to qualify for a conventional mortgage to get the lowest possible rate.

To Eliminate Private Mortgage Insurance (PMI). PMI, which is required by most lenders if your original down payment was less than 20%, is tacked on to your monthly payment. If the value of your home has increased since you bought it, you may be able to have the PMI removed just by having your house appraised. In any case, you can get rid of the PMI when you refinance if you end up with more than 20% equity in your home.

To Tap into Your Home’s Equity. If you have other debt or are anticipating new expenses, such as college tuition bills, you may want to refinance for a larger mortgage at a lower interest rate and use the extra cash to pay off the debt or forthcoming tuition bills.

To Take Advantage of a Lower Interest Rate. The most common reason for refinancing is that the current interest rate is significantly lower than the rate you are paying on your existing fixed rate mortgage. Much depends on variables such as refinancing costs, points, and how long you plan to stay in your home. It is always wise to shop around to ensure you are getting the lowest rate possible and paying the lowest costs.

Deciding when to refinance depends on your personal financial situation and your plans for the future. You may want to do some number crunching in advance to determine how low rates would need to drop for refinancing to make sense for you. Then, if rates decline, you will be ready to make your move.