It's the eternal question for homeowners: When is the right time to refinance? While there are many guidelines, it's generally your own financial situation that dictates when it's time to close on a new mortgage. There are a variety of refinance "triggers" that motivate homeowners. Here are a few of the more general ones:

Refinancing to save money

The majority of mortgage refinancing is done to cut costs. This is especially relevant when interest rates are dropping. A home refinancing may result in either lower monthly payments, or a shorter payment term on your mortgage. Both could save you money on long-term interest. Keep a watchful eye on interest rates, and use a calculator to see how much a refinance can save you. Make sure that you take into account your closing costs. This may affect your decision if you're looking for long-term savings.

Loan improvement

Sometimes, a refinance is triggered by a homeowner's need to get out of his current loan. This is often the case with someone who has a short-term balloon loan or an adjustable-rate mortgage (ARM). With a balloon loan, the entire balance is due at the end of the "balloon" term-typically five to seven years. At this point, unless a homeowner hits it big with the lottery, a mortgage refinancing may be necessary.

A borrower with an ARM may refinance when his or her mortgage rate "adjusts" after the teaser period to a significantly higher number. Other people choose a mortgage refinance to replace an ARM with a fixed rate if they prefer the certainty that comes with a fixed-rate mortgage. And if interest rates are rising, it's often a good idea to lock in a fixed rate before interest rates soar out of control.

Ultimately, determining the best time to refinance comes down to crunching the numbers and assessing your own time parameters. When all the benefits-both in terms of the bottom-line and peace of mind-outweigh the hassles of refinancing, you know the time is right.

Published on January 17, 2009