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When Is It Right to Refinance and What to Keep in Mind

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When you refinance your mortgage, you're basically starting all over again with the mortgage process. Your new mortgage pays off what's left of your old one, and you start making payments all over again on the new one. It's often advertised as a good thing, and while it can be for some homeowners, it can be a terrible move for many others. It all comes down to why you're refinancing and your own unique situation. Here are some reasons why you should — and shouldn't — do it and what to keep in mind if you do:

1. When Not To Refinance

There are probably more reasons not to refinance than there are to do it. Consolidating debt, for example, is a bad idea, especially if you have recurring problems with debt. Never put your home on the line for something like a credit card. If you've been offered the opportunity to refinance at no cost, don't fall for it. The fees involved with securing a mortgage and refinancing will show up somewhere, they may just be hidden. If you're planning to move in the next couple of years, your credit score is low or you can't afford closing costs, refinancing is a bad idea. And, last but not least, never refinance for something like a nice new car, a trip overseas or a whim to start a business. Look for other ways to fund these endeavors.

2. Lower Mortgage Rates

Now that you know when not to refinance, it's time to look at some reasons why it may actually be a good idea for some people. A lower interest rate is one of the top reasons to consider the move. Lenders say that if you can decrease your interest rate by at least one percent, think about refinancing. If you can decrease your interest rate by two percent or more, definitely refinance. You'll build equity in your home this way and lower your monthly payments. If you invest or save the difference, it can be a big win for your financial future. If you aren't concerned with your monthly payments, you may try to secure a shorter-term loan instead.

3. Your Credit Score has Improved

When you first got your mortgage, your credit wasn't that great, but you've worked hard to repair it over the past few years, and your score has gone up quite a bit. In many cases, the higher your score, the lower your interest rates, so it may be worth revisiting your mortgage to see if refinancing makes sense. This is one of many reasons why it's important to stay on top of your credit score. Many experts suggest checking it at least once a year if not more frequently. Just make sure you're making a soft inquiry when you check on your score. Inquiring about it in order to secure more credit or debt can actually lower your score.

4. Your Monthly Payment is Too High

Many experts say that you shouldn't refinance to secure a lower monthly payment, buf if you can't afford your mortgage as if, you may feel like you have no other choice. And this doesn't mean lowering your monthly payments by securing a lower interest rate. In this case, you do it by adding years to your mortgage so that it takes longer to pay it off. It also means you'll pay more interest, so it's actually costing you more money in the long run. If you plan to stay in your current home for a long time, and you do have an extreme circumstance, such as a medical condition that leaves you or your spouse unable to work, refinancing isn't the best option, but it can make life a little easier.

5. Other Reasons You May Refinance

While these are some of the most common reasons why homeowners choose to refinance, there are a few others that you may consider. They include:

Converting an adjustable rate mortgage to a fixed rate mortgage through refinancing makes sense when interest rates are on the rise.
When your home value increases, you can refinance and receive the difference if you opt for a cash-out refinance. As long as you save or invest the money wisely, this makes sense in some circumstances.
When you want to shorten your loan's term and you're still able to make your monthly payment, you may opt to refinance if you can get a lower interest rate.

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