When Is the Right Time to Refinance a Home?

There is no clear date on a calendar that lets you know when it's time to refinance a home mortgage. The scheduling process is unique for every homeowner, depending on a wide variety of factors. Understanding what goes into a refinancing process and how the deal impacts your monthly payments will help you determine when the time is right to start the refinance process.

Start by choosing the type of refinancing plan you will go for. There's cash-out refinancing, which lets you take out a new mortgage for more than you owed and collect the difference between the two mortgages to pay off your existing debt. Meanwhile, a rate-and-term option aims to save money, as you are refinancing the remaining balance of your mortgage for a lower rate on a longer term.

Once you've determined the type of payment plan you'd like to go with, it is time to figure out when to begin the refinancing process. Ask yourself these three questions before starting:

How far along are you?
If you've had your mortgage for a long time already, it may not be wise to refinance. You already will have paid off the majority of the loan, and even if it is difficult to make the payments every month, re-starting that process will set you behind even more. According to the U.S. Federal Reserve Board, most of your payments in the later years of a mortgage go toward paying back the principal and building equity . By refinancing, you are restarting the amortization process, so you'll go back to paying interest instead of building equity.

Refinancing early or in the middle of a mortgage makes more sense, because at that time, you are mostly paying off the interest rate rather than the principal. 

Are rates about to rise?
A common mistake some homeowners make is refinancing right before rates go up. Studying the market trends and consulting with lending experts will help you determine when the time is right to go about refinancing. According to NerdWallet, if your current rate is 5 percent or higher , then the time is right to see if refinancing would make sense before the Federal Reserve raises the key funds rate.

What is your credit score?
Your credit scores play a major role in acquiring a mortgage, and will impact you again when you try to refinance. Many lending agencies promise low rates for refinancing, but as Money Management International warned, those rates are often  just for people with high credit scores. If yours is lower, you may not get the rate you are looking for when applying for a refinanced mortgage loan.

If you know you will want to refinance in a year or two, it may be wise to work on improving your credit score. While your score is not the only factor that will impact the refinanced rate you are eligible for, it can make a major difference in how much you will pay on a monthly basis.

Along with the answers to these three questions, there are other factors to consider. Vectra Bank can help customers figure out when the time is right to go about refinancing a home. Reach out to our Mortgage experts to create a plan that fits best for you.