How Time Influences Mortgage Refinancing

According to the Mortgage Bankers Association, mortgagerefinances are expected to reach $1.93 trillion in 2009, while new mortgageoriginations will reach about $825 billion. The prime factors behind the driveto refinance are the rising rates of unemployment, new programs by Freddie andFannie Mae, and actions made by the Federal Reserve.

With the Federal Reserve constantly working to keep interestrates low, and programs available that encourage homeowners to refinance theirmortgages, this may be the best time to refinance a high-priced mortgage. Thismay also be the best time to refinance a mortgage for a longer term. Whilerefinancing your mortgage for a longer term may substantially increase thetotal amount of a mortgage, it will greatly lower monthly payments. It isimportant to sit down and reassess you financial situation to decide if yourefinancing your home mortgage is an option for you.

Time-in On Your Mortgage before Refinancing

While there is no definite rule about how long you have tohold a mortgage before attempting to refinance, time may play a significantrole. If you had to accept a higher-than-optimal interest rate because of pastbad credit, for instance, and are counting on your improved credit rating toget you lower interest rates on a refinance, you should wait at least sixmonths before refinancing. Six months is about how long it takes most lendersto start reporting your payment history to the credit bureaus.

The timing of a mortgage refinance is a delicate balancingact. The longer you continue paying the higher interest rate, the more it willcost you, but the longer you make regular payments on your mortgage, the betteryour credit score will look when you do apply to refinance your mortgage.

Another effect that time has on your ability to refinance isthat the longer you pay on your mortgage, the higher equity you will have inyour home. This is important because it will determine whether or not a lenderwill consider refinancing your mortgage. First, you will need to calculate howmuch equity you have in your home. It is actually not difficult to figure outyour equity on your own. You first need to find out how much your home iscurrently worth, and then subtract the amount you still owe on your mortgage.For example, if your home is worth $100,000 and you still owe $60,000 on yourmortgage, then your home equity is $40,000 or 40%.

Once you have that figure, you can research the type ofmortgage refinance that a lender will be willing to grant you. Most lendersrequire at least 5% to 10% equity to agree to refinance your mortgage from anadjustable rate to a fixed rate, or to change the length of your mortgage term.Thus, if you want to go from a 30 year to a 40 year mortgage, you should haveat least 5% equity in your home.

How Long You Intend to Stay in Your Home

The other time factor that affects your decision torefinance your home mortgage is how long you intend to remain in your currenthome. Since you will incur closing costs and penalties for early loan repaymentwhen you refinance your loan, it will take time for you to actually realize anysavings on your refinanced mortgage. For example, if you currently are paying$660 a month on a 30 year $100,000 mortgage, you can lower your monthly paymentto $590 a month by refinancing to a 30 year $100,000 mortgage, a savings ofover $70 a month. If the loan closing costs and penalties for early repaymenttotal $2,500, it will take at least thirty six months for you to recover thecosts of your loan. Therefore, unless you are planning to stay in your home forat least three more years, refinancing your mortgage loan will actually costyou money rather than save you money. The longer you remain in your home at thelower interest rate, the more savings you will realize. If you remain in yourhome for another ten years, you will realize $5,900 in savings. If you stay inyour home for another twenty years, you will pay $14,300 less in mortgagepayments at 6% than you would at 5%.

Paying Off Your Mortgage Faster

Another reason to refinance your mortgage is to pay it offfaster. If your financial circumstances change, and you have more money to puttoward your mortgage, you may consider refinancing your mortgage to a shorterterm. You will not only pay off the loan faster and get out of debt sooner, butyou will also be paying considerably less for your home. For example, if yourefinance a $100,000, 30 year fixed term mortgage to a 15 year fixed termmortgage, you will increase your monthly payment from $599.95 to $849 monthly,but you will save $63,000 over the life of the loan.