If you’re a homeowner, I’m sure you have heard a lot about mortgage refinancing on the news lately. After all, with the mortgage crisis that we are still enduring, a lot of nervous homeowners are rushing to refinance their home loans.

The question is — when should you refinance your mortgage loan, and when should you avoid refinancing? This question is high on the list of many homeowners, so we will shed some light on the subject.

When Refinancing Makes Sense

There are several rules of thumb you can use to determine if refinancing makes sense for you. Two of the most common are listed below. Keep in mind these are just general rules about when to refinance a mortgage loan, so you should not make your decision based on these “rules” alone. Always do thorough research and seek the advice of a financial professional.

With that being said, here’s a basic guide on when to refinance a home loan, from a financial standpoint:

• When interest rates are low – This is the primary reason that homeowners will turn to mortgage refinancing in the first place. When the rates are low, homeowners in certain situations can refinance to a lower interest rate, and thus reduce their overall monthly mortgage payment.
• To switch from an ARM to a fixed rate mortgage — This is another common reason why people refinance their mortgage loans. If you’ve been watching the news lately, you’ve seen a lot about ARM loans that adjust to such a higher rate the homeowner can no longer afford the payments. So many will people refinance an ARM loan before it reaches the adjustment point.

The goal of both of these strategies is the same … to either (A) lower the interest rate on the loan, or (B) prevent the interest rate from rising through a mortgage adjustment. In both cases, the goal is to pay less money each month on the mortgage payment.

When Not to Refinance

At this point, it’s important to point out that mortgage refinancing is not always a good idea. Here’s another rule of thumb. If the money you pay to refinance the loan (closing costs) exceeds the money you save over the term of the new loan (lower interest rates), then it doesn’t make sense to do the refi. After all, nobody wants to pay more than they save in a financial transaction.

The key here is to do the proper research to find out what you’ll pay, as well as what you’ll save after refinancing. Once you figure those numbers out, you’ll have an easier time answering that common question — when to refinance a mortgage loan.

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