When done correctly, and at the right time, refinancing a mortgage can save you big bucks over the course of your home loan. Refinancing refers to the process of paying off your current mortgage with a new mortgage. If you obtained your original mortgage with a high interest rate, for instance, you might be able to secure a lower interest through refinancing. Furthermore, it offers homeowners the opportunity to convert an adjustable-rate mortgage into a fixed-rate mortgage (or vise-versa). So, when is the best time to refinance a mortgage?

When to Refinance a Mortgage

Keep in mind that refinancing a mortgage typically costs 3-6% of the mortgage's principle in the form of appraisal, title check, fees and other related expenses. Therefore, you should only refinance your mortgage when it's beneficial. So, how do you know when it's the right time to refinance?

Check the Interest Rates

One of the most important things to consider when refinancing a mortgage is the interest rates. Don't just look at the current interest rates, however; also look at the interest rate of your original mortgage. A good rule of thumb is to refinance when the current market interest rates are at least 1-2% lower than your existing mortgage's interest rate. If you save at least 1-2% on interest rates, it's usually worth the time and money to refinance. If the current interest rates are the same or higher, you should wait until interest rates increase before refinancing.

Convert Your Mortgage

As stated above, another common reason why homeowners refinance is to convert their existing adjustable-rated mortgage into a fixed-rate mortgage. With an adjustable-rated mortgage, you are at the mercy of the market. If interest rates are lowered, you'll save money on your mortgage. But if interest rates are increased, you'll have to pay more. This is why many homeowners refinance so they can convert their adjustable-rate mortgage into a fixed-rate mortgage.

Change Length of Mortgage

A third reason to refinance is to change the length of your mortgage. If you recently inherited or otherwise acquired a substantial sum of money, perhaps you should refinance your existing 30-year mortgage into a shorter 15-year mortgage. Doing so can save you thousands of dollars in interest fees over the course of the loan.

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