When you first consider it, a home refinance may seem like the solution to your problems. However, this is a big decision, and not one you should go into lightly. Here’s how to determine whether or not you should refinance, and how to go about refinancing a home if you decide it’s the best option.
Considerations Before You Decide to Refinance
There are certain things you should take into consideration before deciding whether or not to refinance.
• Credit Score: Your credit score determines your mortgage rate, and you may not even be able to qualify for any type of mortgage if your credit score is too low. If your credit score is below 620, it may be a better plan to work on improving your score before applying for a refinance.
• Current Loan Terms: Find out if your loan has a penalty for early repayment. If it does, consider switching to a loan that doesn’t have that restriction before you refinance.
• Equity: In order to qualify for a refinance, you have to have a minimum of 20% equity in your home; otherwise, you’ll have to purchase private mortgage insurance. That additional charge can counteract the amount you’re saving in payments each month by refinancing.
• Financial Goals: You may think that refinancing is an answer to some of your budget problems, but before you move forward, use a mortgage calculator to determine your post-refinance payments. If you have a short-term loan, your payments will be higher, which may not actually be helpful for your budget.
• Future Move: Ask yourself how long you think you’ll live in the current home. Refinancing a home can cost up to six percent of the loan. You have to figure out the point at which you’d break even. If you’re going to be in the house for longer than that, it might be valuable to refinance.
• Second Mortgage: If you already have a second mortgage, a home refinance can be more complex than usual. You may want to either pay off the second mortgage first, or opt to combine both loans into a large mortgage.
Steps to Refinancing
You’ve weighed the pros and cons, and you’ve decided that you do want to move forward with a refinance. Here’s how to do it.
• Set Goals: Get very clear on your goals – why is it that you’re refinancing? This will help you make decisions along the way. At the very least, you should maintain the loan term you have now, but at a lower interest rate. Even better is if you can shorten the loan term.
• Check Your Credit Score: Get your credit reports and carefully go through them. Any mistakes could be impacting your score, and you’ll want to get them cleared up before moving forward. The higher the credit score, the better your refinance terms will be.
• Home Value: Now it’s time to do a bit of research regarding your home’s value. Check out other similar homes in your neighborhood that have recently sold. You may also be able to use an online home value tool to give you a ballpark idea.
• Shop Around: You won’t find the very best mortgage rates if you don’t do your homework. A good start is to compare refinancing rates online. In order to limit how much the loan applications impact your credit score, pick a one or two week window to submit all of your applications.
• Figure Out Cost: There are several fees that may come with your home refinance, such as application, origination and appraisal fees, plus charges for processing documents, underwriting, requesting your credit reports, researching titles and insurance, and tax transfers (just to name a few!). This may sound overwhelming, but quality lenders should give you a fair estimate of all the fees you can expect. Also, some lenders will include these add-on expenses in the total mortgage cost, which means you won’t necessarily have to pay them upfront, but your monthly payments could be higher than you expect.
• Collect Your Paperwork: Refinancing requires a lot of paperwork, and you’ll want to compile pay stubs, bank statements and any other documentation the loan requires.
• Lock the Rate: When you lock in the refinance rate with your lender, the rate you’re being offered isn’t allowed to change. This is a big decision, and you’ll have to determine the best time to do this, and whether or not you even want to do it at all.
When you’re considering refinancing your home, think about alternative lending options, like hard money loans. While you don’t want to drag your feet on a decision like this, it is helpful to go about everything methodically so that you get the right outcome.