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How late is too late?

This is the question asked by many Americans who feel they’ve delayed refinancing their mortgages for too long. With rising interest rates, the number of mortgage applications and refinance activity has significantly decreased.

Here’s the proof: the Mortgage Bankers Association recently reported that mortgage applications during the last week of May fell 7.6 percent from a week earlier. Meanwhile, the number of refinances lowered from 51 percent to 49 percent of mortgage activity, which marks the lowest level since May 2014.

With interest rates creeping slowly up, many people aren’t motivated enough to go through the process, which can be both taxing and time consuming. But should they be so apprehensive?

For the week ended June 2, rates for a 30-year, fixed-rate mortgage averaged 4.06 percent, up from 4.02 percent the previous week, according to mortgage information site HSH.com. Since many homeowners already have rates in the range of 4.25 to 4.5 percent, the savings they would receive from refinancing isn’t inspiring enough to pursue that option.

Following are reasons to consider refinancing, even when interest rates aren’t at rock bottom numbers, and when it may be best to hold off:

The case for refinancing:

–If it allows you to move into a shorter-term loan, it could help you pay your mortgage off faster.

–If your financial situation has changed to where you’re newly eligible for a refinance (improved equity or credit score), it may be worth checking into.

–If you have an adjustable-rate mortgage. These loans offer a fixed rate for a set period—usually five, seven or 10 years—and then adjust annually. If interest rates rise, your mortgage payment could significantly increase if you don’t refinance to a fixed rate. Refinancing could make sense if you're likely to still be in the home when the next reset happens on your current mortgage, depending on the rate you're paying and the Federal Reserve’s moves to raise rates.

The case for not refinancing:

–If you don't plan to be in your house for very long, you should probably stay in your current mortgage. Calculate the number of months it will take to recoup the closing costs you would pay, and you may likely find it’s not worth it.

–If you figure out that you’ll receive a lower interest rate by refinancing, but extend the mortgage term, you can wind up spending more in interest. For example, refinancing a mortgage that has 20 years remaining with a 30-year mortgage will result in higher interest expense over the life of the new loan.

Important Note: Some people wish to refinance simply to lower their monthly mortgage payments. A lower interest rate and/or a longer loan term both work toward reducing this cost, and as long as you realize you may not be minimizing total interest expense, short-term affordability can be a motivation for extending the loan term.

Bottom line: If you’re thinking about refinancing, but are apprehensive about interest rates or other factors, talk to a financial professional to see whether it could be the right choice. He or she can help you decide whether it’s worth crunching the numbers.

Ron L. Brown, CFP®

Author Ron L. Brown, CFP®

Ron is a CERTIFIED FINANCIAL PLANNER™ and president of R.L. Brown Wealth Management. He specializes in retirement, estate, and business planning for professionals and entrepreneurs. Ron assists his clients with creating a financial plan to ensure they are able to live their ideal lifestyle during retirement and leave a strong legacy for their family. Ron has been featured in The Wall Street Journal, US News, Yahoo Finance, Investopedia, and numerous other high profile financial publications.

More posts by Ron L. Brown, CFP®

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