Refinancing your home is a great way to save money each month and reduce your interest rate, but you need to ask some serious and important questions so you can make the right choice for your needs. If you don’t plan your refinance correctly, it could actually end up costing you money. Since that’s something you definitely want to avoid, you’ll need to make sure you understand the procedure and what’s in it for you. So, should I refinance my home? It’s a question that doesn’t always have an easy answer. Here are nine things you can ask yourself before you make a decision.
1). How much longer do you have to pay on your mortgage?
If your mortgage is almost paid off, refinancing might not have much of a point. You could get a lower interest rate, but your closing costs would cut into any actual savings. Plus, most lenders don’t want to do a refinance for a short period of time, so you might have to get a longer term that would keep you paying on a home that would have been paid off otherwise.
2). Is the value of your home higher now?
If the value of your home has gone down a lot, you might not be able to refinance. The same is true if your home’s value has increased but you were previously underwater on your mortgage. It’s possible that the value of your home hasn’t gone up enough yet to allow you to get a refinanced mortgage. Checking into the value of your house is one of the first steps toward considering a refinance.
3). Are you looking for additional cash?
When you refinance the home you purchased you may want to cash out your equity, but not everyone chooses to do this. It can be a great way to have extra money to work on your house, travel, go back to school, or pay off other debt. A lender can discuss your options with you, and an appraisal of your home can tell you how much equity you have that you might be able to pull out and use if you do a cash-out refinance.
4). Do you have money for closing costs?
Paying the closing costs on a refinance is a good idea. Otherwise they can get rolled into your new loan. That’s less out of pocket or you at the time of closing, but you also have a higher mortgage and you’re paying interest on those closing costs. That may defeat a lot of what you’re trying to do by refinancing in the first place.
5). How long do you plan to live in your home?
If you’re going to be moving in the next few years, refinancing may not be the right choice. It costs some money, and you may not get enough benefit from it if your home is going up for sale soon. Of course, only you can decide what’s right for your financial situation, so you’ll want to talk to your lender and possibly to a financial advisor before you make a decision.
6). What kind of interest rate do you have?
Your current interest rate is an important consideration when it comes to whether you should refinance, because a very small change in your rate of interest may not be enough to make the refinancing costs worth it. When you buy a house your mortgage’s interest rate is important to you. However, you may only have so many options. As rates drop in later years, your interest rate can be a big factor for the cost of your mortgage payment. If you can get your interest rate down at least one full percentage point, a refinance may be worth it for you.
7). What does your credit look like?
Most refinance loans require that you have decent credit. Even though you already own the home, you’re still applying for a new loan. You want to make sure that new loan goes as smoothly as possible, and lenders want to see if you’re a risk. If your credit has problems, working to make it better before trying to refinance your house can make a big difference.
8). What kind of shape is your home in?
If your home is in bad shape you might want to do a cash-out refinance and use that money to make improvements. That can be difficult in some cases, though, because a home that is in too poor of a condition may not appraise high enough to get the refinance loan you want and need. Your lender can help you find what works for you, so you can get a loan on your house that will be financially beneficial to you.
9). Is the neighborhood headed up or down?
What the neighborhood is doing matters. While it doesn’t directly affect your home, it does affect the appraised value. If you’re planning on getting a cash-out refinance, or even just trying to refinance your existing mortgage amount into a lower interest rate, you should do that before your neighborhood heads in a downward direction and property values drop. For neighborhoods where the property values are on the rise due to improvements, waiting a big longer so you have more equity could be the right choice.
2 Point Highlight
Refinancing your home is a great way to save money each month and reduce your interest rate, but you need to ask some serious and important questions so you can make the right choice for your needs.
Your current interest rate is an important consideration when it comes to whether you should refinance, because a very small change in your rate of interest may not be enough to make the refinancing costs worth it.
