What to consider prior to renegotiating your home loan?

Factor #1: What’s happening in the mortgage rate market
Let’s start with those aforementioned interest rates.

Whether you want to lower your payment or change from an adjustable-rate mortgage to a fixed-rate mortgage, start watching how interest rates are moving so you can lock in the best possible rate. “Right now, the time is perfect with interest rates being at a historical low.

Although mortgage rates have been around 3% for two months, the rate you actually qualify for may vary.

The three major risk factors are the type of property you own, the equity you have in the home, and your credit score. To secure the best possible rate, you may want to consider taking steps to raise your credit score before refinancing. These steps include correcting any errors in your credit record and making sure you pay all your bills on time (if not early). Also, shop around with multiple lenders to compare offers — in this day and age, there is no shortage of mortgage lenders you can consider.

“Right now, the time is perfect with interest rates being at a historical low.
Factor #2: The cost of refinancing versus the potential savings
Do you know that old saying that you have to spend money to make money? Whoever said that must have refinanced their mortgage because it absolutely applies to the process. What

Here’s what we mean: Remember those fees you paid when you bought your home? The ones with strange, vague names like origination fees and appraisal fees, not to mention credit report fees and more? We hate to break it to you, but those will all pop up again when you refinance.

In fact, closing costs for a mortgage refinance may come up to 3% to 6% of the loan amount, says Schlandelson. Plus, your lender may charge you what’s called a prepayment penalty fee for paying off your current mortgage early with a refinance.

Add it all up, and you’ll be paying a decent chunk of change to get that lower interest rate. So the question becomes: When does refinancing make financial sense? “You want to be able to recoup the closing cost in less than two years worth of savings. This is a good rule of thumb to know if the refinance is worth it.

Why two years? If it takes longer than two years to break even, the refinance may not be worth the hassle, especially if there’s a chance you could move. (And a lot can change in two years, from having children that require more space, or changing jobs.)

The amount of time it takes you to recoup the cost is called the break-even point, and calculating that break-even point is simple. Here are the three key steps:

1. Add up the refinancing costs
Look at the loan estimate you get from the lender to see what the closing costs would be; add the prepayment penalty fee if there is one.

2. Calculate the monthly savings
Subtract the new monthly payment from your current monthly payment. The difference is how much you’ll save each month.

3. Find the break-even point
Divide the refinancing costs by the monthly savings to see how long it will take for the savings to cover the refinance.

For example, if your current mortgage payment is $1,725 and your new payment would be $1,475 — that’s a savings of $250 per month. If your estimated refinancing costs are $5,000, it would take less than two years to break even ($5,000 divided by $250 equals 20 months). The monthly savings past 20 months will be money in your pocket.