11 Signs It's Time to Refinance Your Mortgage

When you get a mortgage, you might feel a major sense of accomplishment; after all, buying your own home is a big part of the American dream. You might even feel like kicking back and enjoying your home. If you find yourself wondering, "When should I refinance my mortgage?", then this article will help motivate you to get moving.

However, this is not always the best idea. A smart homeowner keeps on top of mortgage rates and the current economic environment. It can make sense to refinance your mortgage in some situations.

How do you know it is time to refinance? Check yourself for these 11 signs:

#1 You Want To Pay Less

Of course! Who doesn't want to have a lower mortgage payment? Mortgage rates have been low for more than 10 years. However, some homeowners may still have a rate that is higher than what can be obtained now. Refinancing can lower your monthly payment by hundreds of dollars and save you thousands in interest over the loan's life.

#2 You Are Close to Retirement

If you still have years left on your mortgage and you are nearing your 60s, you should keep in mind that your monthly income may drop when you retire. Who wants to be house poor when entering their golden years? Check current rates and see if it makes sense to refinance. Keep in mind that closing costs must be paid for every refinance, so you need to be sure it makes financial sense to take out a new mortgage.

#3 You Have Major Unfunded Expenses Approaching

If your house is worth a good deal more than your current mortgage balance, you might be able to refinance and take out cash. Many people decide to cash out and refinance to pay for major expenses, such as a child's college education, starting a small business or buy an investment property for more retirement income.

#4 You Have a 2nd Mortgage with a Variable Rate

Many homeowners have a first mortgage that is fixed with a variable rate HELOC or home equity loan. If interest rates are low, you could consolidate those into one loan with a single monthly payment. You might be able to convert the 2nd mortgage to a fixed rate so that the payment will not go up even if interest rates rise.

#5 You Are Tired of Private Mortgage Insurance

Mortgage insurance is now required on many home loans, including virtually all FHA loans. This insurance encourages mortgage lenders to offer more home loans to more people with low down payments. If you have a loan that has mortgage insurance and you have more equity now than when you took out the loan, you may be able to refinance and stop paying for mortgage insurance. Clearly this is the best time for a mortgage refinance if you have earned some equity or haven't spoken with a broker or lender in the last few years. When to Refinance to Get Rid of Mortgage Insurance

#6 You Are Getting a Divorce

A divorce decree may say that one of you is liable for the mortgage payment, but the lender does not have to honor the decree. It may not remove your spouse from the loan. The only way to take your name off is to have the loan refinanced in that spouse's name only.

#7 Your Rate Isn't Fixed and Rates Are Rising

Obviously, if you have a variable rate mortgage and it looks like rates are on the way up, you would be wise to consider refinancing into a low, fixed rate. If your adjustable mortgage goes up, you could end up paying hundreds more per month.

#8 Your Credit Score Went Up

If you have recently paid down debt or your spending habits have become more responsible since you got your first mortgage, you could have a higher FICO score. This can lower your payment significantly. Current rates for excellent credit in 2016 are well under 4%, so refinancing could save you a lot.

#9 You Have a Lot of Debt

A cash out refinance can make a lot of sense if you have a lot of high interest credit card debt. The interest rate you will get on your mortgage will be much lower than the rate for any non-secured debt.

#10 You Have a Mortgage Insured by the FHA

FHA loans are fantastic products, as they allow people with lower credit scores to get home loans with down payments as low as 3.5%. However, every FHA loan must have private mortgage insurance or PMI, which can cost you $2000 per year or more. Most FHA loans do not allow you to ever cancel PMI. So, once you have at least 20% equity in your home through either appreciation or your monthly payments, you can refinance into a conventional loan to reduce your payment.

#11 You Are Staying In Your House Long Term

If you plan to sell your house in a year or two, it may not make sense to refinance, given that getting a new loan will cost you several thousand dollars in fees and closing costs. If you plan to stay in your home for years, refinancing may make sense.

The Bottom Line

Refinancing a home mortgage into a lower rate is often a very good idea. Just be sure that the costs of refinancing, including all fees, points and closing costs, are more than what you will be saving in payments each year.