Refinancing a home has both positive and negative consequences. Doing so to lock in a lower rate is a smart financial decision. Refinancing to borrow more funds is sometimes a bad idea. You can refinance the day after you take out your original mortgage if you want to, although that's generally not advisable. Deciding whether you should refinance really depends on the reason you are considering this option.
Refinancing can be done to secure a lower interest rate. With a lower interest rate comes a smaller payment. Refinancing also allows you to select a different loan type if you are interested. Examples may be an adjustable rate or fixed rate mortgage.
Refinancing typically has fees associated with it, so it can be costly to process. In fact, the fees associated with refinancing could deplete the overall savings you achieve by reducing your interest rate.
When considering whether to refinance you must determine how long you plan to stay in your home. Paying to refinance a home you do not plan to stay in for long defeats all money-saving purposes because the closing costs will eat all of the savings your experience from a lower interest rate, plus some.
There is no set time frame for refinancing, but depending upon the current mortgage guidelines, your lender may have included a prepayment penalty. This means that by refinancing the current mortgage you would have to pay the penalty for early repayment. Some lenders are willing to waive this if you are completing the refinance through them. It is also important to talk with a lender before you start the refinance paperwork about the home's current equity situation. Depending upon the amount you borrowed initially, the bank may or may not be willing to create a new loan. For example, if the original loan was for 80 percent of the home's value but the new refinance would be for 88 percent due to a decline in market, the bank would be taking on a less stable loan. The interest rate and payment amount on this new loan would likely be higher.
Oftentimes, homeowners incorrectly believe that refinancing their home is always going to save money. Having very little equity is common in a newly purchased home. Refinancing will restart the mortgage terms and thus lengthen the time you will owe payments on your mortgage. When you are planning to stay in the house for a long period of time, refinancing for a lower interest rate can be beneficial. Refinancing when there are plans to sell soon will most likely cost you money instead of saving it.