The amount of time you should wait to refinance your home depends on some key factors. Some deal with your type of mortgage and the lender you are currently with. Other factors depend on your financial situation and the market at the time you are considering to refinance your home. The type of mortgage you already have on your home determines refinancing timing more than anything else, so lets start there.Questions to Ask Regarding Your Current Mortgage
Does it have a seasoning period? A seasoning period is the time the mortgage company has written into the mortgage documents before which you cannot refinance your home. Some people buy foreclosure homes planning on refinancing once they get it re-appraised with enough value to eliminated the Private Mortgage Insurance. Many banks have time lines on mortgages that help them determine when they break even and will not allow the mortgage to be refinanced before then. If there is no seasoning period then any time is good.
Does your current mortgage have early payoff fees? Most mortgages now have eliminated these clauses because consumers caught on to them. However, if your home was mortgaged some time ago, it may have an early payoff penalty. This means if you pay off the mortgage early (even with a refinancing loan) you will pay a fee. If there is no payoff fee then you do not have to factor in those costs.
Is your current home loan fixed or variable? A fixed term mortgage gives you indefinite security with the current interest rate you have. You can wait out the market and your own personal financial situation to determine when the best time to mortgage will be. If you have a variable or adjustable rate mortgage (ARM) then when the fixed term portion of the mortgage (5 year ARM is 5 years fixed) is up, you may have a significant percentage increase if you do not refinance. If your ARM is getting ready to become variable it is a good time to refinance.
What is your current loan interest rate? Don’t look at the APR (annual percentage rate) since that counts in to your mortgage one time costs you have already paid and cannot recover (closing costs, points, etc). Look at the loan interest rate (the lower number you were likely quoted). Once you have figured out the above factors, and have the loan interest rate in hand you can move onto the next set of factors.Questions to Ask Regarding Your Financial Situation and the MarketThe mortgage market fluctuates interest rates for home loans daily. When that interacts with your personal financial situation and its fluctuations, a few months’ time can make thousands of dollars of difference. Here are some pieces of information you need to make an informed decision about when to refinance your home.
What is your FICO credit score? Do not pay or the vantage credit score, since it is not as well known and likely is not what banks will look at. Get your FICO credit score with a number. If your FICO score is above 700 then it may be a good time to refinance your home loan. If your FICO score is below 700, then you will likely want to repair your FICO score before refinancing since it could save you thousands of dollars to do so.
How much cash do you have on hand? To refinance a home loan you often need cash to cover closing costs (average cost is around $2500). You need to be sure you can cover the closing costs and still have a 3-6 months emergency fund in hand.
How long will you be in the home? If you plan on staying only a short time then the refinancing loan will have to pay for itself quickly. If you plan on being in the home for the foreseeable future then you can afford to take a few years for the refinance to pay for itself. Divide the total costs of refinancing by the savings per month over your old loan to determine how long it will take to pay or itself.
Is the APR for a new loan less than the loan rate for the current loan? You basically want to be sure that the costs of closing (assessment, points, origination fee and so on) when considered as part of the interest rate of the loan save you money over the loan interest rate you already have. Again, don’t look at the APR of your current home loan, that includes previous closing costs that you can’t change.