Refinancing can be a great option for home owners who are looking to get a lower interest rate or monthly payment on their mortgage. There are lots of things to think about and much research to be done on this subject, so taking the time to consider these 5 questions is a great place to start.
Will you qualify?
You are in good shape to qualify for refinancing if your credit score has improved or remained the same since you took out your mortgage. You are in danger however of not qualifying if your credit score is lower. Even if you are able to secure a loan with a lower credit score, be wary. You will have a much higher interest rate in this case and it may not make your refinancing worth it in the financial long run. You also may not be able to refinance if you owe more on your mortgage than you originally borrowed for it.
Fixed rate or Adjustable rate?
An option to consider if you currently have an adjustable-rate mortgage (ARM) is refinancing into a fixed rate loan. Interest rates are currently at 4.5 for a 30-year fixed rate and while that may seem high compared to the rates within the last year, it is well below the historical average which is about 7. Securing a fixed rate now can protect you from rising interest rates as the economy continues to heal and normalize. Also, a fixed payment is easy to budget for and generally viewed as safer by most homeowners than an unpredictable ARM. It’s hard to know what mortgage rates are doing, so stay on top of if by keeping an eye on First Team’s Weekly Mortgage Watch to see what’s happening and what the experts are predicting.
Have you refinanced before?
The longer you’ve been in your house, the more likely it is you’ve already refinanced. Every time you refinance, the closing costs get carried on to your credit. By repeatedly financing, you negatively affect your financial standing. If this is your first time financing, be ready to make it your only one.
What are your goals?
Most people are refinancing to get lower rates and payments so they can save some money. One refinancing option is “cash-out financing” which doesn’t save you money but actually gives it to you. “Cash-out financing” allows you to refinance your mortgage for more than you owe currently, and pocket the difference. Let me break it down for you: Say you owe $90,000 on a $140,000 house and want a lower interest rate plus $10,000 to pay down your credit card debts. You can refinance your loan for $100,000 and get a check for that $10,000 you need. By replacing your mortgage like this, you will most likely take longer to pay it off, but if you can secure a lower interest rate in the process, it may be worth your while. If you want to pay off debts, put money down on a new house as an investment, or pay for your child’s school, refinancing can be a great way to do it.
Are you planning to move?
If you are planning to make a move soon, refinancing probably isn’t the right option for you. For example, if you opt for cash-out financing you will own less of your home. What you own of your home is equity, the dollar amount difference between what you owe on the mortgage and the value of the property. You can get a good chunk of change if you refinance but you will own less of the house and it’s going to take time to build equity again. If you’re planning on selling your home in the near future, you won’t get as much in your pocket from a sale if you’ve just lowered your equity.