Homeowners: Planning to Refinance This Summer?
Even though refinancing your home can be wise from a financial perspective (as we learned in part 1), refinancing is also a significant financial decision that requires careful consideration.
Here are more important details that homeowners should be aware of before refinancing their home this summer.
#4. Comparing Loan Offers
Not all lenders or refinance loans are created equal. For this reason, it is crucial to shop around and compare offers from multiple lenders to find the best deal.
Factors to compare when shopping for a lender and loan:
- Interest Rates: Even a small difference in interest rates can significantly impact your monthly payments and total interest paid over the life of the loan. You may be surprised to learn that lenders have quite a bit of control over the rate they offer their customers.
- Loan Terms: Consider the length of the new loan’s term and whether it aligns with your financial goals. A shorter term typically means higher monthly payments but lower total interest. It is also important to note that a new loan resets the home’s payoff clock back to day one, so if you are replacing a 30-year loan that you have ten years left on with a new 30-year loan, then you are essentially adding another 20 years of mortgage payments before your home will be paid off.
- Fees and Closing Costs: Look at the total cost of each loan offer, not just the interest rate. Some loans may have lower rates but higher fees, so it is important to compare everything to ensure that your decision is financially sound.
#5. The Impact on Your Financial Goals
For you to enjoy the greatest success, refinancing should align with your broader financial goals. Consider how it will affect your long-term plans, such as retirement, savings, and investment strategies before you make your final decision. Working with a trusted financial advisor can help you get a better understanding of how your refinance will affect your finances.
Key questions to ask your financial advisor include:
- Will refinancing help you pay off your mortgage sooner?
- Can you invest the savings from lower monthly payments into other financial goals?
- How will refinancing impact your tax situation?
#6. Preparing for the Application Process
Just like when you applied for your original home loan, the refinancing process involves a lot of paperwork and documentation. Being prepared can streamline the process and help improve your chances of approval.
Some of the documentation you will need will include:
- Proof of Income: Recent pay stubs, tax returns, and possibly bank statements.
- Credit Report: Check it before you apply to ensure it’s accurate and free of errors. Check it early enough to give yourself enough time to fix any unexpected issues.
- Home Appraisal: An appraisal will need to be done to determine your home’s current value.
- Loan Statements: If you are refinancing with the same lender as your original loan, then you may not need this, but if you are changing lenders, then your loan statements will be required because it contains information about your existing mortgage.
It’s essential for homeowners to do the work that’s necessary to help ensure you are in the best position possible to enjoy all the benefits that can come from refinancing.
By taking the steps listed above, you can help ensure that refinancing your home is not only a smooth process, but also a financially beneficial one.
