When trying to determine whether to refinance, personal factors should play a role in your decision. It is generally not advisable to refinance if you plan on being in the house for only a short time. If you need money for a specific purpose, refinancing can be an easy way to access it. If you plan on being in the house for an extended period of time. or if you have a significant financial need, it may be an appropriate time to refinance.
One of the factors to consider before refinancing is the interest rate in the market. Compare the interest rates in the market to the interest rate of your existing mortgage. A general rule of thumb is to consider refinancing if the interest rate that you can get on a new mortgage is 2 percent lower than what you currently pay.
You may also want to consider the mortgage insurance requirement on your loan. Private mortgage insurance is charged on loans in which the homeowner has to borrow more than 80 percent of the value of the home. If you have sufficient equity in your house to refinance without having to pay private mortgage insurance, it could be an appropriate time to refinance. If you are close to the 80 percent threshold on your mortgage balance, you may refinance so that you can get rid of mortgage insurance.
Before making your decision, you should also look at the costs involved with refinancing. When you take out a new loan, the new lender will charge closing costs. You can get a good-faith estimate from each lender that outlines the closing costs on your loan before agreeing to anything. If the closing costs are low enough that you can save money along with a cheaper interest rate, it may be an appropriate time to refinance.
The best time to refinance is different for everyone. You have to look at your individual situation to determine if it is in your best interests. For example, if you need extra cash and you have a very low mortgage balance, it may not be in your best interests to take out a new mortgage at a higher interest rate just to get the cash. You could instead use a home-equity loan to get the money you need.