Is now a good time to refinance your mortgage loan?

Refinancing a mortgage simply means paying off an existing loan and replacing it with a new one. There are many reasons homeowners choose to refinance their mortgage: to lock in a lower interest rate and a lower monthly payment, to choose a different loan program, to pull cash out using the equity they’ve built up in the home, or to pay off their mortgage more quickly. However, knowing when is the right time for you to refinance will depend on your individual circumstances.

If you are currently struggling with a high-rate loan or a monthly payment that you cannot afford, then refinancing will probably make a lot of sense. But for those who already have a good low-rate loan and have been paying on it for quite some time, the decision may not be that easy.

Here are some things to consider:

Closing Costs
When you refinance your mortgage, typically the same fees that you paid when you purchased your home could apply once again when you refinance. These fees generally run between 3% and 5% of the loan’s principal balance.

Pre-payment Penalty
Another important thing you need to consider prior to refinancing is whether or not you will have to pay a prepayment penalty to get out of your existing loan. If so, you will need to add this amount to your closing costs in order to determine the overall cost of your refinance.

If you have a copy of the Note that you received from the lender when you closed your current mortgage, you will typically see a prepayment rider with this document if a prepayment penalty exists.  You should be able to determine the amount of the penalty and its expiration date. If you cannot find this document, try calling the customer service number listed on your payment coupon or monthly statement.

How long do you plan to stay in this loan?
When considering whether or not to refinance your mortgage, you want to realistically look at how long you plan on being in the home. You need to make certain that once you have figured what the total costs will be for refinancing your home that you will actually be in the loan long enough to recoup these costs from the decrease in your payment if you are simply refinancing into a lower rate. Otherwise, refinancing your home may actually end up costing you more money instead of saving you money.