Refinancing: Timing is everything

Posted by  on Apr 09, 2015

Time is money, and that principle is clearly illustrated when it comes to refinancing. There are several aspects of refinancing that all come down to timing, and getting the timing right can make the difference in how beneficial your new mortgage is, or even whether you are able to refinance in the first place.

  1. Hitting the right part of the interest rate cycle. Recent years have seen the lowest mortgage rates in history, creating a tremendous wave of refinancing. Prior to 2009, 30-year, fixed-rate mortgage rates had never dropped below 5 percent. Now, they have been below 5 percent since early 2010, and below 4 percent for much of that time. Having a mortgage when interest rates drop steeply might seem like a matter of lucky timing, but think of it this way: people who got sub-4 percent mortgage loans might never get the chance to refinance, but they are better off overall because they got to pay low rates from the start.
  2. Applying when your mortgage is above water. For some homeowners, the tantalizing thing about low mortgage rates in the years following the Great Recession was that housing prices were also down, preventing them from refinancing because they owed more on their existing mortgages than their homes were worth. So, timing matters in terms of whether your mortgage is above water when refinance rates happen to be low. While you can't do anything about the rise and fall of home prices, you can improve your chances of keeping your mortgage above water by being disciplined about not dipping into equity too much.
  3. Applying when your credit is healthiest. Families have their financial ups and downs, and refinancing can be a way to ease your budget troubles. Unfortunately, the time people need that help might also be when their credit scores are down. This can make it hard to get approved for refinancing, or at least hard to get the most competitive refinance rates. You can improve your chances by working to keep your credit healthy, and budgeting so you can anticipate trouble rather than waiting until the wolf is at your door.
  4. Choosing the time frame for your new mortgage. Another element of timing is deciding just how long of a refinance mortgage to choose. Longer refinance periods are often tempting because they minimize monthly payments, but keep in mind that shorter refinancing time frames allow you to build equity faster and lower your long-term interest burden.
  5. Judging your repayment period. It is easy to use a mortgage calculator to do a side-by-side comparison based on how things stand today, but you also have to think ahead when planning your refinance strategy. Here, timing matters from the standpoint of how much longer you expect to be in your current home. If you expect to pay off your mortgage early, shy away from loans with high up-front payments, and you might even consider whether an adjustable-rate mortgage might be the best option.

Some of the above timing issues are more under your control than others. Still, while you might not be able to influence the interest rate cycle or the housing market, knowing the importance of those ups and downs to refinancing will help you know how to act when the opportunity presents itself.


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