You might think of mortgage refinancing primarily as a way to lower your interest rate and save on your monthly payments. Other reasons to refinance your mortgage include reducing the term of your loan, switching from an adjustable mortgage to a fixed-rate loan, or taking advantage of the capital you’ve earned in your home and refinancing cash.
Here are the 7 things to keep in mind when you refinance your mortgage:
Reason For Refinancing
Refinancing a home loan can be expensive, so it’s essential to know why you want to do it. For example, maybe you want a lower interest rate or a monthly payment, or you want to refinance cash out to pay off high-interest debt or make some home improvements.
Whatever the reason, make sure it’s worth the costs and labor associated with refinancing your current mortgage.
Current Mortgage Rates
It generally doesn’t make sense to refinance a mortgage unless it’s lower than what you’re currently paying. Before you start applying, check current mortgage rates to see how they compare with your current mortgage.
Your Credit Score
While average mortgage rates can give you an idea of whether or not you can save, the actual rate of a refinancing loan will largely depend on your credit history, current debt, and income.
Know your credit score to see where you are. If it is lower when you first bought the house, you may need to take steps to improve your score before applying.
Your debt-to-income ratio (how much of your gross monthly income goes towards paying down debt)- is an important factor in determining your eligibility for a mortgage loan. If you have a low debt-to-income ratio, you can get pre-approved for a home loan. If you’ve taken on more debt since you received your existing mortgage loan, it could make it more difficult for refinancing.
If you’re hoping to tap some of your home equity with a payout refinance, home value is an important indicator of whether you qualify and how much you can take out.
Closing costs for a mortgage refinance can range from 2% to 6% of the loan amount, amounting to thousands of dollars. If you don’t have enough cash to pay those closing costs out of pocket, you may be able to put them into the new loan — provided the loan still meets the requirement of being 80 percent or less of the home’s value.
However, if you put them into the refinance, you’ll pay interest for the life of your new loan.
New Mortgage Term
Refinancing gives you a new interest rate with a new term. You have the choice between a 10-year, 15-year, or 30-year mortgage. While a shorter term will get you out of debt sooner, you’ll want to make sure your budget has room for a larger monthly payment.
To Sum it Up
Refinancing your home can be a tricky and time-consuming process, but these tips and tricks can help you make the process go smoothly.