People often wonder, "When is the right time to refinance your mortgage?" Unfortunately, there is no magic number that tells you when to refinance. However, interest rates are key to your decision. If you want to lower your interest payments by refinancing, then you only want to refinance your mortgage when interest rates fall. It used to be that interest rates had to fall 2 percentage points before it was considered the right time to refinance your mortgage because the costs associated with refinancing your mortgage were so high (Irwin 212). However, now you do not need to wait until interest rates drop two percentage points. With the increase in competition between lenders, it is easier to find low cost refinancing (Opdyke 53).   
     So basically, the right time to refinance your mortgage is anytime you save money. To determine if you will save money from refinancing, there are two things to consider (Faerber 125):

1. How much money will you save?
2. How long do you plan on living in your home?

    
    You should always look at how much money you will save when considering when it is the right time to refinance your mortgage. That is because you need to compare how much money you will save versus how much money it will cost to refinance your mortgage. After finding out how much money you will save, next you will need to discover how many months it will take for you to break even. That will tell you how long you must live in your home in order for your refinancing to be worthwhile.  
    An easy way to calculate how long it will take you to break even when refinancing your home is offered by Jeff D. Opdyke in his book The Wall Street Journal. The Complete Personal Finance Guidebook:


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                                        How Much You Will Save Each Month


    For example, let's say your old monthly payment was $2,000. Your new monthly payment is $1,800 and to refinance your mortgage it costs you $6,000.  Then you would subtract $1,800 from $2,000 ($2,000 - $1,800 = $200), which equals $200.  Next you divide $6,000 by $200 ($6,000/$200 = 30), which equals 30. That means it will take you 30 months before you break even when you refinance. If you decide to refinance your mortgage, you must make sure that you will not move sometime in the next 30 months. Otherwise you will loose money instead of saving money, which is the opposite of what you are hoping to do.

The Tough Part of When is the Right Time to Refinance Your Mortgage?

    It is easy to figure out how to judge whether or not you will save money by refinancing.  However, it is hard to tell whether you should wait for interest rates to drop further or take the ones offered right now. While there is no concrete answer to that question because no one ever knows for sure how the interest rates will change, it is always smart not too wait too long for rates to drop further. That is because the time it takes for you to wait for rates to drop further is time your spending paying a higher interest rate. Sometimes if you wait too long for rates to fall, you won't save as much money as you would if you were to refinance earlier at a higher interest rate (Reed 147). Therefore, the answer to "When is the right time to refinance your mortgage," is whenever you feel you are saving enough money to make it worthwhile.
    
Building Equity Versus Tax Breaks

    Another thing to consider when choosing when is the right time to refinance your mortgage, is whether you are too far along in your current mortgage to switch to another one.  If you have been paying off your current mortgage for a long period of time, you probably are starting to pay off large chunks of your principal (Irwin 212).  At that point you have a crucial decision to make. Is it more important for you to build up equity so that you can take out a home equity loan or line of credit in the future or would rather refinance your mortgage and get the tax break you would get from paying off the large amount of interest on the new mortgage you would get (Irwin 212).  Only you can decide which decision is right for you. But the answer to that question will help you to answer your original question, "When is the right time to refinance your mortgage?"


Mortgage Refinance Guide Sections: