There are few easy answers when it comes to your investments, and refinancing a mortgage is no exception. Although refinancing has become a popular choice for many homeowners, the process can be confusing, making it difficult to decide whether or not you’re a good candidate. The best way to muddle through the details and find out if you’re making a wise decision is to meet with a financial advisor, but first you should understand what refinancing is, why people do it, and which homeowners make ideal candidates.

“When interest rates go down, there’s a flurry of homeowners who are interested in refinancing their mortgages. This lowers their monthly payments and allows them to use the extra cash to pay down debt or beef up their savings,” said Esther Abrahams, Real Estate Lending officer with Cameron State Bank’s Home Mortgage Department. “On the surface, this could seem like a good situation all the way around. Most people would love to lower their mortgage and save more money. Although refinancing is often a good and sound decision, it’s not as simple as it may seem.”

The act of refinancing does cost money. There are mortgage application fees, closing costs and title insurance premiums to consider. So if you decide to refinance, make sure it’s the right time. If you refinance too early, you may forfeit your opportunity to refinance months later, when the interest rates fall again. Timing is everything, but it’s also tricky, since no one knows how low they’ll fall, or when.

“As soon as interest rates start to go down, there’s a group of homeowners who want to refinance right away, and then are disappointed when the interest rates go down even more,” Abrahams said. “It’s impossible to predict future interest rates. That’s why it’s so important to discuss the decision with a financial professional. Financial advisors can’t foresee the future either, but they usually have access to additional industry information, and they have reference sources for giving any more insightful advice.”

In addition to considering the logistical costs of refinancing, it’s important to analyze several other factors, including the size of your mortgage, how much longer you plan to live in the home, and interest rate volatility. If you plan to stay in your home indefinitely, it may be ideal to refinance if the interest rate falls one or two percent from the original mortgage, but if you plan to move soon, that doesn’t make as much sense, according to Abrahams.  She says the value of your home and its marketability are also factors. 

“If the appraisal does not meet the criteria for the type of loan you are seeking, refinancing may be a problem.”  

Another thing to realize is that a poor credit history could hamper your ability to refinance, so before you make the appointment with your banker, order a free copy of your credit report. It’s best to know where you stand financially before making any significant financial decisions, including refinancing. It’s also a good idea to go through your budget to see other areas where you can cut back and save.

“If you’re considering refinancing your mortgage because you’re having trouble making ends meet, you have a bigger issue to address than just your mortgage. You should be looking at your mortgage payment as well as all other expenses to find out exactly where your money is going and to identify the best places to trim your budget. Getting a lower interest rate may be something you should do, but you should only do so after you’ve looked at your complete financial picture and the impact it may or may not make,” Abrahams said.