Refinancing can be a great money-saving tool for homeowners, or it can be the wrong thing at the wrong time. Last year, according to the Mortgage Bankers Association, Americans refinanced to the tune of $1.17 trillion. The rising cost of fixed-rate mortgages brought it to just $938 million this year. That is still a large number of people who choose to refinance their home or commercial mortgages. Here are some guidelines to help you decide if this is the right time to refinance.

What you should know before refinancing

You need to be able to answer a few basic questions about your home or real estate investment before you can make an informed decision about the best time to refinance. For example, what is your current interest rate? Is it fixed or variable? Is your home increasing in value? Can you afford the closing costs associated with refinancing? What are your plans for your home or real estate?

This prior knowledge will help in several ways. If you plan to move within the next three years, or if the difference in interest rates is less than 1.5%, refinancing may not be cost effective at this time. Remember, once you refinance, it takes time to recoup the closing costs you’ve invested. However, if you have a variable rate that is rising, or a significantly higher fixed rate, refinancing can offer you some attractive options.

Why do people refinance?

People refinance for different reasons. In many cases, the decision to refinance can help lower your monthly payments and interest, or reduce the life of your loan and principal owed. Others get a cash-out closing to make home improvements or pay off consumer and credit card debt. This method generally does not reduce your payments.

Before deciding to refinance

But before you make the decision to refinance, keep in mind that there are costs involved. Closing costs and points will affect the amount of money you must pay up front to refinance. One point is equal to 1% of the total amount of your loan. You should expect to pay 2-3% in points when you refinance. Just like when you bought your home or investment property, the more money you put down, the lower your interest rate is likely to be. There are cases where you can get a free closing, and these are ideal, but not always available.

A word of caution; If you find yourself refinancing annually to pay off debt, you’re not doing yourself a favor. In this situation, you are probably increasing both the life and the principal balance of your loan amount. This is a short-term solution that can have long-term consequences.
What can help?

To help get the lowest interest rate when you refinance, you can do one of two things. Put as much money as you can up front, or use that money to pay off the consumer’s credit card debt. Since your interest rate and the amount you can borrow are tied to your credit score, you can save money by improving your score before you refinance.

And don’t forget to shop around. You’ll find many lenders willing to work with you, and mortgage rate calculators are available on many real estate websites. A little homework now will save you a lot of money later.