When to Refinance Your Mortgage

Refinancing a mortgage means paying off an existing loan and replacing it with a new one. There are many reasons why homeowners refinance:

• To obtain a lower interest rate and smaller monthly payments
• To shorten the term of their mortgage
• To convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa
• To tap into home equity to raise money for a large purchase, to consolidate debt, or to deal with a financial emergency,

Since refinancing can cost between 5% and 7% of a loan's principal and—as with an original mortgage—requires an appraisal, a title search, and application fees, it's important to know when it's worthwhile and when it's better to wait.

When Should You Refinance?

Refinancing your mortgage is a big step. As such, there are several things you should consider before you sign the paperwork. Most borrowers consider mortgage rates they want to refinance. Locking in a lower rate is an important factor to consider when you want to refinance because it effectively lowers your payments. But it shouldn't be the only thing to focus on when you want to renew your mortgage.

Here are a few other factors to consider before you apply:

• Your home equity. Make sure you have equity available in your home. This is key if the value of your home drops below the value when you purchased it. It's also important to note that many lenders (especially conventional lenders) won't refinance your mortgage if you don't have enough equity in your home.
• Your credit history. You won't qualify for a refinance if your credit score doesn't meet the minimum requirements. Take the time to build up your credit score before you apply.
• Refinancing costs. If you have a mortgage, you'll know how much you paid in additional costs. As such, you'll have to pay these expenses again—usually a small percentage of the loan. Try to find ways to negotiate so you can reduce the costs.

Other points you'll want to note are your debt-to-income (DTI) ratio, the overall term of the refinance, and whether you qualify for refinance points to reduce the interest rate on the loan. Source