Mortgage refinancing is a process where a homeowner allows a lender to buy out his current mortgage in order to offer him a new loan with different terms. Because home mortgages are the largest source of debt for many families, refinancing can sometimes yield large savings over time. The best time to refinance will depend on many factors, such as prevailing interest rates and the terms of the original mortgage.

Interest Rates

The purpose of mortgage refinancing is to save money on a loan. Perhaps the most important factor to consider when refinancing a mortgage is the interest rate on the original loan and the interest rate you could get on a new, refinanced loan. If you took out your original mortgage during a period where interest rates were high and rates have subsequently fallen, there's a good chance that refinancing will be able to save you money by reducing the amount of interest you owe. The further the interest rate drops the more you stand to save, so it is important to pay attention to trends and analyst opinions before refinancing. If interest rates are expected to fall further, it can be wise to hold off on refinancing to capture even lower interest rates. This is especially important, considering refinancing might result in various closing costs and fees. Your goal is to refinance once so that you only incur such costs once. Refinancing several times as interest rates fall might lower your rate, but the costs of refinancing might sap any savings that you stand to gain.

Terms

Another reason to refinance a mortgage is to change the terms of the loan. The main change that can result in a large amount of savings is changing a variable-rate mortgage to a fixed-rate mortgage or vice-versa. For instance, during a period of low interest rates, it is a good idea to have a fixed rate mortgage, since you will be locked in a low interest rate if rates happen to rise. On the other hand, when interest rates are high, it might be beneficial to have a variable rate mortgage, since the rate will adjust downward if interest rates fall, which can save the costs of refinancing to capture lower interest rates.

Mortgage Extension

A third instance where mortgage refinancing can be useful is when mortgage payments are too large or burdensome and the borrower needs a mortgage extension. When refinancing, the duration of the mortgage can be extended, resulting in a reduction of monthly payments. For instance, if you paid off a mortgage for 10 years but lost a job unexpectedly, refinancing to a new 30-year mortgage could reduce monthly payments significantly, since you have already made payments for 10 years on the first mortgage. This can help borrowers get through tough financial times, but in the long term it might lead to less wealth accumulation because interest will continue to accrue for a longer period of time.

Source:

Bankrate: When to refinance your mortgage

When does it pay to refinance a mortgage?