Rates are low and you may be thinking about refinancing your mortgage to save some money. While a lower rate can be a driving factor to refinance, you need to consider some other pros and cons about the refinancing process. If your credit score isn't quite up to par or you plan on moving in the near future, refinancing could actually be a bad financial move. So how do you really know when it's time to refinance? Here are some tips to help you make the most informed decision:
Factoring in up-front costs
You may have great credit and qualify for a low rate on that refinancing package. However, you will incur some up-front costs that can take a few years to recover. If you don't plan on staying in the home for the full length of the loan terms, you may never reach the break-even point and could end up losing money on the deal. Remember you will be responsible for paying a good sum in closing costs, legal bills, and other fees as part of the refinancing process. Meg Crane for Right at Home Daily points out, "Obviously, the longer you plan to live in your home after refinancing, the more time you'll have to recover any up-front cash you have to pay out."
Your credit standing
Just like the initial mortgage application process, the lender will need to look at your credit score to determine if you are creditworthy. If your credit score has dropped significantly in the past year -- whether it was because of a series of missed payments, or even from mistakes reported on your credit report -- you probably won't qualify for those low advertised rates. It can take up to a year to improve your credit score and fix any major errors or mistakes. GoBankingRates.com reports that it can take between 12 to 18 months of making regular payments to boost your credit score by 100 points.
If you initially signed on for an adjustable rate mortgage (ARM) loan and have been struggling to keep up with the fluctuating interest rates, refinancing to get a fixed-rate loan can be a smart financial decision. According to Bankrate.com, "A refinance doesn't pay off the debt, it just restructures it, often at a lower interest rate and a different loan term than the current mortgage." As long as you plan on staying in the home for the next 15 to 30 years, you could lock in a low rate with a 15- or 30-year fixed-rate loan.