Mortgage refinance activity tends to perk up whenever interest rates fall, indicating that mortgage borrowers often think of a drop in interest rates as the primary reason to refinance a mortgage. While an opportunity to save money on interest rates is certainly a great reason to refinance, there are also several other valid reasons.  

Reasons to refinance can be organized into three categories: money saving strategies; risk management strategies; and budget management strategies. 

Money Saving Refinance Strategies

The following are conditions under which you can save some money by refinancing your mortgage:

• Interest rates fall. While an Adjustable Rate Mortgage (ARM) will capture the drop in interest rates automatically, a Fixed Rate Mortgage will not change unless you refinance it.
• Your credit rating improves. Your interest rate was determined in part by your credit rating at the time you originated the loan. If you have substantially improved your credit rating you may be eligible for a lower rate.
• You can afford to shorten the mortgage term. If your monthly budget balance improves to the point where you can afford a bigger mortgage payment, consider refinancing from a 30-year to a 15-year mortgage. Paying back the money faster will mean that you pay less interest over the life of the loan. As an added bonus, 15-year mortgage rates are generally lower than 30-year rates. 

Risk Management Refinance Strategies

If you have an ARM, you may have become unnerved by the way the adjustable rate can alter your mortgage payments from one period to the next. This is the fundamental risk of an ARM, and you can eliminate that risk by switching from an adjustable rate to a fixed rate.

Unfortunately, people tend to worry about this risk most when the adjustable rate has risen. The best risk management strategy is to switch from an adjustable rate to a fixed rate when rates have just fallen. Sure, one of the appeals of an ARM is that it will capture that lower rate automatically, but if you then refinance to a fixed rate you can reduce future risk by locking in that lower rate.

Budget Management Refinance Strategies  

Some refinance strategies don't save money, but they do give you more flexibility in helping your monthly payments fit your budget. Two examples:

• Lengthening the term. This means more overall interest expense over the life of the loan, but if you are having trouble meeting the monthly payments, it will help by spreading those payments over a longer period.
• Refinance to an Option ARM. An Option ARM not only features an adjustable rate, but also allows you some degree of flexibility in accelerating or slowing down your monthly payments. Be aware that slowing down the payments will cost you more down the road, but if you have some month-to-month unpredictability in your income an Option ARM may help you manage your payments to match that unpredictability.

Any refinance strategy should be based on a significant change--after all, there are closing costs to consider. However, keep in mind that change is just as likely to come from your situation as from the mortgage market.

Source:

Mortgage Bankers Association