The decision to refinance your home is a lot like the decision you made to buy your first home. You have to confront many of the same questions from a different angle. Those questions include:
• When is the right time to refinance?
• How do I find the best deal?
• What bank should I work with?
• How long until I experience the benefits of refinancing?
• Is all of this really worth it?
Homeowners usually refinance mortgages for one of two reasons:
1. To lower their monthly payment
2. To access home-equity
Interest rates are often referred to as “moving targets.” To reap the benefits of refinancing your home, you have to take aim and shoot at the right moment; otherwise, you will miss out on the advantages.
Whatever your reasons for refinancing your home might be, you need to make sure that you do it at the right time.
Reading the Road Signs
To narrow your field of options properly, pay attention to the constants involved, not the variables. There are four signs to look for before you consider refinancing your home.
Road Sign #1: The 2% Rule. If you are a novice in the refinancing process remember, it involves closing costs. When those closing costs are high enough, it can offset any financial benefit you could’ve gained from lowering your interest rate. Look for deals that lower your current interest rate by at least 2% so that it makes the process of refinancing your home worth it.
Road Sign #2: Is there a move in your future? This is actually the most important question you should ask before making a decision about refinancing. Lenders recommend weighing the staying is gaining principle. Homeowners who plan to stay at their current location for at least the next 3 to 5 years have the most to gain from refinancing. It can take up to two years to see the financial benefits from this process; therefore, if you plan to move within two years or less, now is not the right time to refinance.
Road Sign #3: No-Cost; No Foul. There are exceptions to the timeframe rule. A no-cost refinancing package is one of those exceptions. Lenders will often bring incentives with them to the table when qualifying homeowners are looking to refinance. No-cost refinancing means that the closing costs are included in the interest rate. If you can find a deal that has no closing costs and still lowers your interest rate by 1 to 2 percent, forget about the timetable and refinance now.
Road Sign #4: The Cost-to-Value Ratio. This is the bank’s debt-to-income ratio for homeownership. If you owe more than the current property value of your home to the bank, tread carefully. The prime window of opportunity when refinancing your home is when you owe 80% or less on the mortgage. This gives you the best value for the life of your mortgage.