The bottom line is, before making your decision, be sure to evaluate your financial situation, ask yourself if you need to refinance, and make sure you use different resources to weigh the costs and benefits of refinancing.
Refinancing your home can be a wise financial decision when done right; it could save you a lot of money down the road. If done incorrectly or at the wrong time, it could cost you.
If you’re unsure where to start with making this decision, you’ll need to understand when to refinance a mortgage and why you want to refinance. Maybe you want to modify your loan term or start a home renovation project. Whatever the reason, you’ll want to pick the right time to refinance, so you end up benefiting from it instead of paying for it later.
Understand the Reasons to Refinance
There are many reasons to refinance your home; the following are the most common:
Shorten or extend your loan term. If you have trouble making monthly payments on your mortgage, a refinance will give you more time and lower your monthly payments. If you decide to lengthen your term, make sure you consider the probability that you’ll pay more in interest over time.
If you decide to refinance to shorten your term, you can expect lower interest rates and a potential increase in how much you pay monthly. However, a shorter term means you’re closer to becoming a homeowner.
Cash-out refinance. For those with other debts, you might choose to refinance your home to withdraw money and pay it off. You can use a cash-out refinance to consolidate multiple debts as well. This strategy will replace your current loan with one of higher value and take out some of the equity you’ve built.
You can also take advantage of cash-out refinancing to contribute to your retirement savings or invest in your home’s value. You can take money out of your equity to do home renovations such as finishing the basement, upgrading your master bathroom, or anything else you want to give a facelift in your home. Remember that your cash-out refinance is still a loan, so if you’re going to do home updates, be sure to get estimates from contractors before finalizing your refinance to ensure you only take out what you need. Also, it is important to understand the cost to refinance your mortgage as well. This is often times a larger cost upfront, however it will save you money in the long run
Conduct a Cost-Benefit Analysis
There are several factors to consider when determining whether or not to refinance. These include your current and the new mortgage amount, your current home value, your loan’s current and new interest rate, closing costs, property taxes, mortgage insurance, and homeowner’s insurance.
You’ll want to consider these additional fees before refinancing:
- Mortgage Application Fee ($75-$500)
- Property Appraisal Fee ($225-$700)
- Loan Origination Fee (0-1.5% of Loan Principal)
- Inspection Fee ($175-$350)
- Survey Fee ($150-$400)
- Attorney and Closing Fees ($500-$1,000)
- Title Search and Title Insurance ($400-$900)
- Local Recording Fee ($25-$250)
- Reconveyance Fee ($50-$65)
The last two fees’ rates will vary depending on your situation. The local recording fee may be higher or lower according to the area of your home’s location. Lenders may or may not charge a reconveyance fee to end their interest on your home.
Before deciding to go forward with anything, assess your finances to see if you can refinance your home while staying in line with your long-term and short-term goals. Use all the tools and guidance available to you to help you make the most financially sound decision. Consider using a mortgage refinance calculator or consulting a financial professional about your concerns.
Check if You Meet the Basic Requirements
One of the most important things to consider when looking to refinance your home is to meet the basic requirements, which include the following. First, make sure you’re able to request refinancing. Depending on the lender, there could be a waiting period after you have bought the house before you’re able to make the request. If you’re able to refinance, make sure you meet the rest of the following requirements.
Check Your Credit Score
Check your credit score before refinancing. Typically, you’ll need an acceptable credit score of around 580 to 680 to refinance, but it can vary across lenders. The general rule of thumb is that your chances of approval go up with your credit score. Also, consider your debt-to-income ratio. This is debt that could include expenses such as student loans or credit card debt. If you’re looking to refinance, this number shouldn’t be too high because your lender could reject your request. However, if it is substantial, there are ways you can lower your debt-to-income ratio before trying to refinance.
Consider Your Home Value and Mortgage
Consider your home equity. Its market value should exceed your mortgage balance by 3% to 20%. Speaking of mortgage balances, you’ll also need to make sure you haven’t missed any payments. If you have, get up to date on payments now, so your mortgage is in good standing. An additional benefit of paying your mortgage payments on time is that it will increase your credit score and help your chances of approval. Be sure to consider closing costs as well and have enough funds to pay them upfront, or you’ll have to pay them another way.
Check if Rates Have Lowered
Lower rates on home loans aren’t necessarily a requirement, but they’re worth keeping an eye out for them when you want to modify your mortgage. When interest rates are lower, it’s typically a good time to refinance because the interest rate will determine how much money you pay for your home. It’s an excellent idea to refinance if you were settled with a high-interest loan when you bought your home because you could end up saving money by refinancing for a lower interest rate.
Should I Refinance?
It’s crucial that you run the costs of refinancing your home to see if it will benefit you in the long run. Ask yourself, “How long will it take for my monthly savings on this new mortgage to outweigh the cost of how much it costs to refinance?”
If you have enough equity in your home to refinance or can sustain your lifestyle comfortably after refinancing, it is probably okay to go forward with it. However, if you plan on selling your home in the near future or are in a difficult financial situation, it’s probably best to hold off on refinancing.
The bottom line is, before making your decision, be sure to evaluate your financial situation, ask yourself if you need to refinance, and make sure you use different resources to weigh the costs and benefits of refinancing.
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