Important Questions to Ask Yourself Before You Refinance Your Home Mortgage
Interest rates have been rising faster than most real estate experts have predicted, so more homeowners who may have been thinking about refinancing their home mortgages this year are suddenly faced with having to make a quicker decision. After all, the goal of most refinances is to save money with a lower interest rate, and every week they wait can wind up costing them some of their potential savings.
That said, just because you want to refinance doesn’t mean that you’re in a good position to do so. Before you refinance your home mortgage, ask yourself the following questions to help determine if you’re ready.
How Much Equity Do I Have in My Home?
The amount of equity you have in your home is the difference between what your home is worth and what you still owe on your current mortgage. To qualify for a new loan without having to pay private mortgage insurance (PMI), you need to have at least 20% equity in your home.
You can still refinance with less than 20% equity, but the added cost of PMI could negate any savings you might be expecting. If you don’t have 20% equity and you want to refinance without having to pay PMI, then you would have to do a cash-in refinance and make a down payment of at least 20% of the new loan amount.
Is My Credit Good Enough to Secure a Lower Rate?
An FHA loan can be acquired with a credit score of 500, but with a score that low, you can expect your interest rate to be higher than what your lender is advertising. The grim truth is that the economic fallout that was brought on by the pandemic has lenders tightening their loan qualifications more than usual. So, having good credit is more important than ever for getting a home loan at the lowest rate. If your credit score has dropped since you got your original home loan, then you may not qualify for the interest rate you need to see any savings.
What Is My Reason for Refinancing?
Homeowners choose to refinance their mortgages for a wide variety of reasons. Some do it to take equity out to pay for expensive things like home improvements, college tuition, or medical bills, while others do it to save more money on their monthly expenses and free up cash flow.
When applying for a refinance, it is important to know your reasons for refinancing. Not only will your lender want to know why you are refinancing but sharing this information with your lender will help them match you with the product that best meets your needs.
Do I Want to Restart My Home Ownership Journey From Scratch?
The idea of saving money on your monthly mortgage payment can be so compelling that it can be easy to forget that refinancing your home loan wipes out all the progress you made on your original loan. You will be getting a brand-new loan with a 30-year term, so you’re essentially restarting your homeownership journey from scratch. This is something you should strongly consider especially if you are nearing retirement.
How Long Am I Planning on Staying in This Home?
The typical refinance costs about two to three percent of the loan amount. So, even with the savings you’ll get, it will take some time before you break even with the amount your refinance costs you. This is an important thing to think about because you could be losing money if you choose to sell the house before you reach your break-even point.
Before you refinance, calculate how many months it will take to recoup your closing costs. If you find out that it will take three years to break even but you aren’t planning on living in the house for at least four more years, then you won’t be saving as much money as you expect.
Don’t Be Impulsive. Stop, Think, and Make the Best Decision for You
With your home being the largest single investment you will most likely ever make, you want your home loan refinancing decision to be well-thought out. You need to give it the attention it deserves to make sure that now really is the best time for you to go for it. The last thing you want to have happen is for you to have buyer’s remorse.
So, consider the above questions carefully. If you are sure that refinancing makes the best financial sense for your situation, then now is a good time to apply because interest rates aren’t going down.
