When is the best time to refinance my home?

There is no one best time to refinance your home, as the right time may vary based on your intentions. However, a good time to refinance is when federal interest rates drop, and you can get a lower interest rate. That is always a good time because a lower rate will lower your monthly payments and save you money over the length of the loan. You can also refinance when you have enough money to decrease your loan term or you want to switch from a fixed-rate to an adjustable-rate mortgage. These are all good reasons to refinance, but it is important to keep your break-even point in mind. Because it will cost you some money to refinance, between fees and closing costs, even though you are saving money overall, it will take time for your savings to even out with the costs, which is your break-even point. Your intentions for your home dictate when the best time to refinance or if you should refinance at all.
By intentions, we mean how long you plan to stay in the refinanced house versus your break-even point. If you are still planning to live in the home after that point, refinancing is a beneficial decision. For example, if it costs you $6000 to refinance and you are saving $150 a month on that mortgage, you will break even in 40 months. If you plan to sell the home before those 40 months have passed, you have not saved anything by refinancing. The break-even point should be a factor to keep in mind when deciding to refinance to lower your monthly payments. If you are trying to pay off the loan quicker, you are not expecting lower monthly payments, just as a cash-out is not for lower payments, either.
So, if we assume that you intend to stay in the home for a couple of years, the best time to refinance is when the federal interest rate is low. Interest rates, however, are largely beyond a borrower’s control. For factors within your control, the best time to refinance you have a comfortable financial situation. When lenders are looking at your credit score, they evaluate your DTI (debt-to-income) ratio and the value of your property as they prepare a loan estimate. Ensuring that you are in good financial standing will help you to receive the best offer you can. These three aspects of your financial status are the major factors influencing the rate and loan terms a lender may offer. A loan estimate will show you the loan terms, projected payments, fees, and potential closing costs for your refinancing and is much like a preapproval letter that you got from multiple lenders when you bought your home in the first place. And like the Preapproval letter, you will want to apply for a couple of these at once because comparing them will give you the ability to pick the best one for you.

Next, let’s look at each of the things that lenders look at to determine the riskiness of lending to you and see what we can do about them. First, your credit score is easy to know but can be tricky to manage. Higher credit scores are best, and the best ways to keep it high are to keep your utilization low and paying bills on time. You will want to keep your utilization of all your credit cards below 30% if possible, which will give you a boost in points. Second, we should talk about your debt-to-income ratio, which is the relationship between how much your monthly debt costs you and your income. The ideal for this ratio is 20%, and 40% would have you considered under financial stress. DTI can be improved at the same time as bringing up our credit score. If you can pay down your credit cards to reduce that aspect of your monthly debt, you can reduce your DTI ratio and increase your credit score. Lastly, you will want to prepare for your home appraisal by fixing small things in your home and cleaning up the clutter inside and outside on your property. When you refinance, the bank will appraise your home to ensure the home is worth more than the amount you owe on the existing loan. This is the LTV ratio or your Loan-to-Value ratio and is measured by dividing your mortgage amount by the home appraisal value and is expressed as a percentage. You want your home appraisal to come in high because this means your LTV ratio will be lower. Just like your DTI ratio, the lower this value is, the better. LTV ratios below 80% are good and will avoid PMI on a new loan.
If you have all of these factors in check, your credit score is high and your DTI and LTV ratios are low, you are in a good place to refinance. Then you should wait for lower federal interest rates and apply for multiple loan estimates from lenders. When all of this is together, it will be a great time for you to refinance.