Mortgage refinancing may sometime be a great way to save money and this is really a good option in theory. But you should take your time and before opting to refinance think of some important questions we’ll talk about below. Remember, there are more things to consider in addition to interest rates. So, if you want to save money, make sure to find the right deal. Sometimes refinancing can be a stressful and expensive process and in the end, just harm your credit history and nothing more. Here we provide some important points to help you clearly understand what refinancing is, how it works and what the risks are. Well, to make the refinancing a smart approach, go deep with these questions and make sure you will reduce overall borrowing costs.
What is a refinance?
Refinancing your mortgage means to pay off your current home loan and get a new mortgage with different terms. Here is the deal. You should look into refinancing only if you are absolutely sure you’ll have better terms, not just different! Sure, one with bad credit history can’t hope for a refinance.
#1: Can I afford refinancing costs?
As we’ve already mentioned there are some extra costs when refinancing. It’s important to know all those expenses and calculate whether it is ok for you to pay for them. The federal reserve of the United States mentions that refinancing costs may include but are not limited to such fees as application and appraisal fees, loan origination fee, home inspection, and insurance costs and closing fee. Not fun, agree?? So before thinking of your possible refinancing from 5% interest to 4% make sure to understand all these expenses. It may sometimes cost you $15.000 or more and is not worth.
#2: Will I get lower interest rates?
To understand if you’re going to save some money or not, first of all, you should look into your mortgage interest rate. It makes sense if you’re going to refinance and get your new mortgage with a lower interest rate and do some savings. Right? It’s a good idea to get 3,5% instead of 6%. As now rates stay on their historic low percentage, you may consider refinancing. On average, this will save you $150 on monthly payments. Do not underestimate refinancing cost, as we’ve mentioned in the 1st point. Do some simple math: if it’s only 10 years left to pay off your current mortgage and you’re going to pay $15000 refinancing fees and you will only save $150 monthly, there is no need to refinance. Still, if you’re on halfway and you are ok with all other questions, go for it and make it financially better for you.
#3: What about extra years?
Again you should think about the years you’ve paid and are still going to pay. Sometimes it’s better to have slightly higher on a monthly basis than opt for a refinance. For example, if you’re going to refinance for your $300.000 and you’ve paid for it for already 5 years. Refinancing means to have your mortgage for 35 years, instead of 30 you had to pay before. If you’re saving $65.000 due to a lower rate, in monthly payments you will have to pay more than $80.000. So, when refinancing, it only makes sense to refinance at a 15 or 20-year term, but not 30.
#4: What about my credit score?
Think about your credit score. Is it good enough to consider a refinance? It’s a good idea to take care of our credit score before a possible refinance. Make your payments on time and try to pay down your credit card balance. In fact, your credit score will play the biggest role to get a good mortgage rate. If you’re a borrower with a credit score less than 620, you’re not likely to qualify for a mortgage with good interest rate even if you’re not refinancing.
#5: How long will I stay in this home?
Think about your future plans and see if you’re going to stay in your current home for a long time. If not, refinancing is not worth for you. This is an important question to ask yourself. Are you going to move to another city or state in the near future? Or do you need to buy a new bigger house in your neighborhood? Are you a growing family or maybe you’re moving in a few years when you retire? Do your children need to live somewhere else to be close to their school or college? If you find out in the answers to these questions that you’re going to move in a year to two, refinancing is not the best option for you.
#6: What are my plans for the future?
It’s again about your future plans. Make sure you have considered all possible options. Are you going to change your job or is it really stable? Your employment history is as important to lenders as your credit history. If you tend to change your job each year or more frequently, you’re more likely to change it again and there is no guarantee that your next job will be as good as the current one and you’ll get as much salary as now. Also, consider not to have in your short term plans any other big purchase. It may be a car or other big debt. A lender will not approve your request, if you have a new expensive car, as it means more and higher expenses and monthly payments.
#7: Is it really a good idea to opt for a refinance?
Refinancing is not a good idea when your savings are too small and they do not cover the costs. You should consider that you pay more interest rate for your mortgage during the early years. So, if you’re going to refinance you’re going to the process again and your saving will not cover the costs of refinancing. You should also think about lenders standards. Are you a good fit for them? Are you able to provide all the documents they may ask – starting from your bank account statement and ending with your tax returns? Besides, you never know for sure what interest rate you can get beforehand. Even if the interest rates are low, the type of the loan you want to refinance into and again your credit score will affect the rate you’ll have.
Be sure not to hurry and not go into the deal alone. Do your research and work with a good mortgage specialist.
By: Hermine Aslanyan