When to refinance a mortgage

A: There are no specific rules concerning either how long you should wait or how many times you are allowed to refinance a mortgage. You may refinance whenever there is a financial advantage in doing so.

That would likely occur when mortgage interest rates have declined at least half a percentage point to a full percentage point from the level they were at when you first acquired your mortgage. Say you started with a 30-year fixed rate mortgage of $150,000 at 5.5 percent but rates are now 4.5 percent. By refinancing at the lower rate, you would be able to save $91.65 on your monthly payments.

Conversely, even if rates have remained stable, you may wish to refinance in order to accelerate the equity buildup in your home by paying off the mortgage faster. You might prefer a 15-year mortgage, with higher monthly payments, if your income has risen.

Another possibility is that you have an adjustable rate mortgage but are concerned that interest rates are going to climb. You may prefer to take out a fixed rate mortgage, locking in the current interest rate, so that you will be protected against future rate hikes.

Anytime you refinance, however, you may incur application, appraisal and legal fees. Or you may be paying for points to obtain a lower interest rate. (Typically, one point equals one percent of the loan amount and will lower the interest rate by .25 percent.) Some lenders may also charge you a penalty for paying your mortgage off early, although this is not allowed in some states.

You have to be sure your savings will be greater than these expenses. In particular, you have to be sure you will remain in possession of your home long enough to recoup the costs of refinancing.

Dan Moore
VP, Product Management

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