Things To Consider Before You Refinance Your Mortgage
When someone is refinancing a mortgage, this means that they are obtaining a new mortgage to replace the original one that they first had. Although, it can be a good strategy for borrowers with good credit history in search of a lower fixed interest rate instead of a variable rate: The 1st loan gets paid off to then start 2nd loan.
Not only does a reduced interest rate work to save money in the long term, but it also increases the rate at which a homeowner builds equity in their home. It can also minimize the size of their monthly payment.
Here are some things worth considering as you think about refinancing.
How much equity is already in your home?
Whether the economy is up or down, it’s not always easy to make payments on your house each month. Every time you make a mortgage payment though every month, you raise your chances of ownership with your house. As home values start to rise consistently, this means you own more with your home that is consistently gaining value over time.
How much will it cost to refinance?
There’s always a cost to refinancing. With that being said, don’t be shocked if you are spending up to 3% of your principal plus any third-party fees or costs. Also, some lenders will offer loan programs with all closing costs credited so keep that in mind. You should always ask for that option if it’s what you would like.
How long do you plan to live at your home?
Your timeline is an important thing to thing about and consider because you may have plans to move before obtaining the benefits of refinancing. You should probably plan on living in your home for a few years at the least.
You should always know your break-even point, when that 3% to 6% is covered by your monthly refinancing savings. Suppose your refinance costs $4,000 and saves you $200 per month, you’ll want to stay there for about 20 months in order to cover that expense of the refinance. Any time spent in your home beyond that puts more savings in your account.
How is your credit score?
The better your credit is, the easier your refinancing will be. Pay down small revolving debt before running your credit application as soon as possible. This will typically boost your FICO score.
For the simple fact of refinancing a home, can also impact your credit score. Your lender will check your credit history, and these actions can potentially shave some points off your score.
You will ALWAYS get the best interest rates with a credit score of 760 or better. You can expect to put some money down if your credit is below that threshold when refinancing.