Home refinancing can be a great way to improve your financial position. The idea is simple. If you currently have a home loan, you can pay off that loan with the help of a new home loan; in other words, you’re replacing your existing mortgage with a new one, and preferably one with more favorable terms.
Under the right conditions, this financial play can help you pay less money per month or pay off your home faster. However, it’s not always strictly beneficial, and some homeowners jump into refinancing without thinking. It’s important to do your research before you move forward.
What You Should Know Before Refinancing a Home
Before you pursue home refinancing, make sure you know these things:
1.What are your goals? First, think about your goals in refinancing. What are you hoping to achieve? There are many good reasons to seek home refinancing, and a few questionable ones. If you’re interested in lowering your interest rate, extending or shortening the terms of your mortgage, or rebalancing your cash and debts, refinancing could be right for you. Just make sure you understand your motivations clearly before continuing.
2.What rate are you currently paying? What is your current mortgage interest rate? Most of the time, home refinancers attempt to lower their interest rate—but you won’t be able to do this if you don’t know what you’re currently paying. Look at your recent mortgage payments to see for sure.
3.Are you paying an adjustable or fixed rate? In an adjustable rate mortgage, your interest rate can fluctuate based on market conditions—and in many cases, it can increase over time. In a fixed rate mortgage, you’ll have a consistent rate locked in. Fixed rate mortgages are preferable, so if you currently have an adjustable rate mortgage, you’ll have even more reason to refinance.
4.How much equity do you have in your home?How much home equity do you currently have? This refers to your ownership stake in the property. If your property is worth $150,000 and you currently owe $100,000, your home equity is $50,000. The higher your home equity, the more favorable a position you’ll be in.
5.How are your other finances? Think about your other debts and cash on hand when refinancing. In some cases, refinancing can help you pay off your other debts, or optimize your portfolio to be more balanced.
6.What is your credit score? A higher credit score will grant you access to better interest rates and more favorable terms. If your credit score is too low, you may consider working to improve it before seeking refinancing.
7.What home refinancing rates are available? These days, you can shop for a home refinancing rate online. Are you able to secure a refinancing loan with a lower interest rate than what you’re currently paying?
8.What terms are you going to seek? Some homeowners refinance so they can change the length of the loan. Are you interested in getting a 15-year mortgage or a 30-year mortgage? Note that this time period starts when you refinance—not from the date you originally bought the home.
9.What are the fees associated with this loan? There are usually one-time fees associated with refinancing. Make sure you understand what these are before you move forward.
10.What is your break-even point? Let’s say it costs you $1,500 to refinance your home loan. What would be your break-even point? If you’re getting a better interest rate, and you’re saving $100 per month, you’ll save $1,200 per year—and in just over a year, you’ll save enough money to completely justify the refinancing fees.
11.Will you owe PMI? Most lenders charge borrowers private mortgage insurance (PMI) on a monthly basis if they don’t have sufficient home equity. This is an additional fee that can increase your monthly payments unnecessarily. Generally, this threshold is 20 percent; you’ll need a 20 percent down payment or 20 percent equity to avoid PMI when refinancing.
12.What are your taxes? Note that your monthly payments aren’t only going to be your principal and interest payments on the loan. You’ll also be responsible for paying property taxes on your property, and those taxes can change from year to year. Look up property tax rates in your area before refinancing so you know what to expect.
Is Refinancing Right for You?
Home refinancing is a beneficial move for many homeowners, but it’s not perfect, and it’s not guaranteed to help you. If you’re thinking about refinancing, spend some time doing your due diligence and scrutinizing your current financial positions. This isn’t a decision you should make in a single day, so make sure you have all the information before you move forward.
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