Your mortgage is your biggest debt, so you want to keep it as low as possible. Refinancing can help with that. It’s also the most expensive way to borrow money. Here are seven things to know before you refinance your mortgage.
1) You need to have money for closing costs
Refinancing your mortgage is not like getting a second mortgage or home equity line – you cannot simply expect to get the difference between what you owe and what you can borrow from another lender. Refinancing basically means paying off an existing loan and replacing it with a new one, and the specialists at omahamortgageguy.com recommend that you work closely with your lender regarding this option to avoid unwanted surprises. What happens in refinancing is that your bank or lender pays off your old mortgage with the new one. However, you should know that this process is not entirely free. Make sure that you save enough money before refinancing to cover all the costs associated with this type of transaction (appraisal, title search, origination fee, etc.) because they could add up to thousands of dollars.
2) The lower the interest rate, the better
This may be obvious but it shouldn’t be your first concern when trying to save money on refinancing. While it will obviously affect the cost of your loan, lenders charge penalties for taking out more than 80% of what is left on your current loan. So don’t base your decision solely upon getting a new loan with a lower interest – make sure you also get a good estimate of the fees you will have to pay.
3) Your credit score needs to be near perfect
The lower it is, the harder it will be for lenders to find somebody willing to take over part or all of your current mortgage. Those with less than stellar credit should work on improving their score before even trying to refinance their loan because this could save them hundreds or thousands of dollars in fees and interest. It will also help them get a better deal on their new loan.
4) You need at least 20% equity in your home
Even if you are “upside-down” on your mortgage, refinancing is not an option for you. You need to be able to prove that you can afford the new payments while paying interest only on the amount of money left on your existing loan. As mentioned earlier, a good credit rating can help you get a favorable refinancing arrangement and options. While it is a general rule of thumb in mortgage refinancing that you should have at least 20 percent equity in the property, some lenders may still allow you to refinance even if your equity is less than 20 percent as long as your credit score is good.
5) You need an appraisal
Even if you don’t plan on taking out more money than your current loan balance, refinancing still requires an appraisal because it determines how much money the new lender is willing to lend you. They will determine the value of your home based on this report.
6) You need to be prepared for fallout if things go wrong
If the appraiser comes back with a lower assessment than you expected or if there are major repairs that need to be done on your property, refinancing might not be worth it because you’ll end up paying more in interest and fees than your savings would have been. For this reason, make sure all issues with the structure of your house (damage, faulty wiring, etc.) are fixed before even thinking about refinancing.
7) Your mortgage must mature or come out of the amortization schedule
If your loan is still in its “interest-only” phase, refinancing will usually be a bad idea because you’ll end up paying more than if you left things as they are and kept making interest and principal payments. The same goes for loans that mature every 5 or 7 years; lenders typically won’t want to take them on until they reach maturity. If you keep making interest-only payments, the total amount paid each month can actually be higher than what it would cost to start repaying both the mortgage and the debt itself (meaning you owe money on top of your existing balance).
When thinking about refinancing your home, there are many factors to consider – from how much equity you have built up in your home to the strength of your credit score. Although refinancing will usually result in a lower interest rate and lower monthly payments, it is not always worth it for everybody or for every type of loan you may have. Make sure you understand all the complexities and implications before even considering this option by saving money, improving your credit score, and talking to multiple lenders about potential fees.