What is Refinancing?
When you refinance your home, you’re basically replacing an old mortgage loan with a new one at a lower interest rate. This sounds good, and it definitely can be, but bear in mind that there are fees and other costs associated with refinancing that can nibble away at the money you saved via your new, lower interest rate. Refinancing also involves a lot of paperwork, so you may want to hire a professional to look things over before signing on the dotted line. That said, here are some things to consider prior to refinancing:
How much do I currently owe on my home?
Ever get one of those high pressure sales calls from a refinancing company claiming they can save you thousands of dollars on your mortgage? If the balance you owe on your home is less than $75,000, their pitch falls apart pretty fast. When you ask would-be lenders to add up their refinancing fees and points, plus any penalty fees for paying off your first mortgage early, they have to admit those interest rate savings will probably be lost in fees.
Unless you need an immediate reduction in your monthly mortgage payment to cover a financial emergency, it usually doesn’t make sense to refinance a small outstanding balance. Making an approved early withdrawal from a 401(k) account might be a better way of coping with a sudden, serious financial downturn.
Is refinancing right for you? This guide can help you find out.
What is my credit score?
As you begin to earn more in your career, you’re better able to take out loans for cars, homes and other major purchases. And chances are you’re also better able to pay these bills on time. As a result, your credit score goes up. The higher your credit score, the more likely you’ll be able to obtain a lower interest rate on a refi compared to your rate when you first bought your home.
Do I have a variable rate loan?
Maybe you took out a variable rate loan because you didn’t think you would be in your home for very long. Now three years has turned into six, and sudden surges in interest rates are making you dread each new mortgage payment. If your credit score is good, you may be able to refinance to a fixed rate mortgage loan. You won’t see those super appealing introductory rates you got when you first took out an ARM, but the stability of a fixed rate loan can do wonders for your peace of mind.
Am I carrying a lot of credit card debt?
One reason for refinancing is to lower your monthly mortgage payments, then use the money you save to pay down high interest credit card debt. You can also use your savings to pay off student loan debt or any debt where the interest rate is higher than that of your home mortgage loan.
The First offers competitive home equity loan rates. Find out more here:
The bottom line:
A lot of factors determine whether or not you should refinance your home. Just make sure you weigh the costs and benefits carefully and never allow yourself to be pressured by a high intensity sales pitch or seminar.