Now is the time to refinance?
When rates fall, refinancing can be tempting. But when do you need to refinance and when should you keep?
When refinancing makes the most sense
Refinancing is generally a good idea when it will save you money or when it will improve the situation in some way (even if it costs money). Some examples of good reasons for refinancing are:
- Get a lower interest rate or shorter loan repayment period after the rate drops
- Eliminate a second mortgage that has a high interest rate
- You qualify for a better mortgage after improving your loan
- Apply with a higher income (either because your earnings have increased or you can add your spouse’s salary to your household income) and get better terms
In all the examples above, it’s important to make sure that you actually improve things. Getting a smaller monthly payment does not mean to save you money. It improves your cash flow situation but can actually result in higher total interest expense over your lifetime.
Refinance before applying for other loan
If refinancing is important to you, make sure you get approved for refinancing before applying for other loans. Your credit becomes malicious every time you apply for a loan (this is called a query), and it takes your credit to be as refreshing as possible.
After your refinancing is complete, go ahead and buy that car or apply for that credit card. Refinancing is less likely to negatively impact those loans (after all, you already had a loan – you just swapped it out for a new one). The only exception to this may be if your monthly payment increases after refinancing.
For example, if you want to switch from a 30-year mortgage to a 15-year mortgage, your monthly payment can be increased (but you will spend less on interest). Depending on your debt-to-income ratio, this higher repayment may make it difficult to lend after refinancing. On the other hand, if you get a car loan before refinancing, you may not be able to refinance. Choose what matters most and take that credit first.
It is also a good idea to refinance before a business change. Borrowers like to see stability and a consistent source of income. The more you do at your job, the better. This is not to say that you cannot refinance after you take the step (or even the step, depending on your loan and other factors), but it is best to apply for a loan when you were with the same employer for a dock. Plus, it’s a lot harder to get credit when you’re self-employed; if you went down that path, you would certainly try to refinance before leaving your day job.
Time and economy
Refinancing is most attractive when interest rates fall. Lower rates mean lower interest costs and lower payments (unless you extend the loan by getting a new 30-year loan, for example, which would result in increased interest costs).
Sometimes you can even get a short-term loan without much change in your monthly payment.
But when is the right time to pull the trigger? Are you doing it now, or wait for the prices to go down? It’s really impossible to know the answer, and trying to get too fancy is dangerous. Generally, you should refinance when deciding if it makes sense to do so. You do not have to break your neck trying to get the job done quickly, but you should not drag your legs.
Rates will always go up and down. They may fall immediately after refinancing, which is unfortunate. But things can always go the other way. Control what you can control; refinancing when you see an opportunity to improve your situation and don’t wait to get the timer right – it’s impossible to see the top or bottom of the interest rate until it comes to a fact.
Sometimes you will be lucky and sometimes you will not, but things will probably balance out in the long run.