When Should You Refinance?

Refinancing can be a tricky process that overwhelms many homeowners, especially people who don’t love math. After all, refinancing a home mortgage is a complex financial process. So instead of getting lost in the numbers, a better approach may be to sit back and carefully consider whether or not refinancing really makes sense for you.

Here are some considerations that may indicate it’s a good time to refinance:

 

You can Afford a Higher Monthly Payment to Pay Off your Loan Faster

If you find yourself in a position to make higher monthly payments on your mortgage, then you may want to refinance a 30-year loan into a 15-year mortgage. That allows you to pay off your loan in about half the time, which means significant total savings over the long term. Because a shorter loan means you’re paying interest on borrowed money for fewer years, refinancing is worth it — if you can afford higher payments. Just don’t be tempted to shorten your loan if you have high-dollar purchases in your near-term financial plan. If you know you need to buy a new car or begin paying college tuition, for example, or if you’re uncertain about your income stability, it may be better to hold off on this type of refinancing option.

Interest Rates are Down more that 2 Percent

Two percent is the golden rule of refinancing. If you can save this much on your loan, go ahead and refinance if you can. If interest rates drop more than 2 percent, most financial experts agree that refinancing is probably a very good move. But even if rates a down less than 2 percent, refinancing can still be worth it if you’re borrowing a significant amount of money — as in more than $100,000 to be paid over 30 years. Think about what your new monthly payment would be, ask your mortgage provider when your break-even period would be on a refinance and then go with your gut.

You’re Facing Foreclosure

If you’re unable to make your monthly payments, consider refinancing as an option to avoid going through foreclosure. You can stretch an ambitious 15-year loan to 30 years or even do a complete restart of your mortgage with a lower payment. Pursuing this option means you’ll be in debt longer, but that’s often a better scenario than foreclosure or bankruptcy.

Refinancing isn’t always the right move, but it can offer significant financial advantages in some situations. Talk with your mortgage provider about the pros and cons of refinancing and find out what types of refinancing options are available for you. Try to familiarize yourself with your provider’s offerings before beginning a refinancing process. Different mortgage lenders offer different services, so take some time to look through your provider’s website. Nationstar, for example, offers military and Jumbo loans, which can help in certain scenarios. Pursue options that make it possible to save money on your loan and avoid penalties.