Planning to Refinance Your Mortgage? Ask These 4 Questions First
Deciding to refinance is a crucial financial move that can help you make significant savings. When you plan properly, do your research, and take time to evaluate where you stand financially, you'll be able to determine whether refinancing is actually a sound financial decision for your particular situation. To help ease the decision-making process for you, here are several important questions to ask yourself before committing to a new loan agreement.
Do I intend to stay in my home for a long time?
Refinancing is generally a smart choice if you plan to live in your home for around five years or more. If you think you'll be moving out to another location due to your job or other circumstances and you'll have to put up your home for sale in the next few years, then refinancing may not be a good option for you. Keep in mind that refinancing requires a considerable amount of money when it comes to closing costs, potentially reaching up to thousands of dollars. Your possible savings may not be enough to recuperate the hefty costs. To make sure the costs do not exceed the benefits, find out your break-even point, which refers to how long it takes to recoup the costs. You'll be able to gain real savings after the break-even point. Use an online mortgage refinancing calculator to get an idea of your break-even point as well as your prospective net savings.
Is my credit score good enough?
To qualify for the best mortgage rates around and decrease your mortgage payment, your credit score should be 760 or higher. Make sure to keep track of your credit report and practice financially savvy habits, such as paying bills in full, avoiding late or missed payments, and reducing debts instead of accumulating more. A high credit score translates to a positive credit history, giving lenders the impression that you're good at managing your finances and you likely won't default on your loan.
What costs are involved and can I afford them?
When approving and processing a refinance, lenders typically charge for origination, insurance, legal, appraisal, title search, and application costs, among others. These fees may reach thousands of dollars depending on the size of the loan. As mentioned earlier, comparing your potential net savings versus your total costs is critical to determine whether refinancing actually makes sense. Additionally, you should have enough funds to cover the costs. Some lenders may allow financing of closing costs, but this option can ensnare you in a steep debt trap. The last thing you'd want is to pay a huge amount of interest besides the closing costs upon selecting a long term to finance the costs. Try to set aside a portion of your income each month to save up enough money to pay for the closing costs in full.
Do I have enough equity?
When getting a new loan, remember that you need 20 percent or more equity to skip paying for private mortgage insurance, which can offset the possible savings of a refinance. If you don't have sufficient equity in your property, it may be a smarter decision to avoid going the refinancing route.
Refinancing can be complex and daunting, but you can reap immense benefits when you do it at the right time and for the right reasons. With the help of the questions above, you can reach a well-informed decision and determine if taking out a new loan is a sound choice. Just be sure to dedicate time toward understanding the refinancing process, especially the closing process, and to read the contract thoroughly before signing any new agreement.