November 13, 2013 THE VILLADOM TIMES I • Page 9 Determine the best time to refinance a mortgage Refinancing a mortgage is advanta- geous to homeowners for a variety of reasons. The primary reasons people refinance their mortgages are to reduce their monthly payments or free up equity to use toward home improvements or other necessities. Lenders will frequently advertise that “now” is the time to refi- nance, but people should get all the facts before making a decision. A low interest rate is not reason alone to refinance. Conventional wisdom has long suggested that borrowers wait to refinance until interest rates drop two percent below their current rate. While a low interest rate is important, there are several other factors to consider. Closing costs: Refinancing a home is an expensive undertaking. While it can effectively shave $100 or more off the monthly payments, there is a financial outlay during the process, which includes closing costs. A person can expect to pay anywhere from two to five percent of the loan’s value in closing costs when refi- nancing. Lenders used to enable some to roll the cost of the closing into the mort- gage, but stringent rules have changed the way many banks now do business. If the finances are simply not there to cover the closing costs, refinancing may not be an option. Credit rating: If your credit rating is better now than it was when you initially earned your home loan, this might be a good time to refinance. Lenders often base their assessments of borrower reli- ability and stability on those potential borrowers’ credit scores, so a strong credit score makes you look better in the eyes of lenders. Borrowers with poor credit ratings may not benefit from refi- nancing. Income: A person’s debt-to-income ratio is another factor in determining mortgage interest rates and approval. A positive change in income status and reduction in debt could make it a good time to refinance. Adjustable rate mortgages: Many people opted for adjustable rate mort- gages when buying homes years ago. Over time, their monthly payments may have increased considerably, making it nearly impossible to afford a home. Refinancing for a fixed-rate mortgage, regardless of the current interest rate, will likely ease some financial burden. Home value: A higher home value means more equity in the home. This money can be used to pay down debt or for home improvements that further improve the value of the home and prop- erty. It is important to speak with a real estate professional to determine if home values have spiked in a particular neigh- borhood and to gain an accurate appraisal of the home. This will help determine if refinancing is frugal. Interest rates: Lower interest rates often motivate homeowners to refinance, as a lower interest rate can save hom- eowners a substantial amount of money over the course of their loans. However, refinancing too soon (within four years of the original home loan) may put hom- eowners in a negative light. Lenders may see borrowers who refinance too soon or too frequently as risky borrowers who cannot successfully manage their money. Prepayment penalties: Certain mort- gages have prepayment penalties. Should a person pay off the mortgage too early, usually within two to five years, two to four percent of the home’s loan value must be paid out. Refinancing counts as paying off one loan and opening another. Penalties could deter a person from refi- nancing too soon. Determining the best time to refi- nance your home mortgage takes effort on the part of the borrower and informa- tion about market trends. By doing one’s homework and being aware of certain factors, a person can save money by refi- nancing a home loan.