Many homeowners refinance their original mortgage at least once during the course of homeownership. For some, several refinances will take place which may or may not extend the time of loan payments. When considering taking the plunge, there are 7 questions to ask yourself before refinancing:
1. How is my credit score?
Does your credit score fall within the range that is acceptable to lenders? Taking a look at your credit report and cleaning up any errors is the first step to improving your credit history. In addition, make sure that any debt payments are made on time in order to prevent any derogatory information from being posted on your report. Keep debt down to a minimum in order to improve your debt to income ratio. Don’t be tempted to close any old accounts since this may or may not hurt your score. On the other hand, having too many active accounts can also hurt your scores.
2. Do I have enough equity in my home at this time?
Equity is a big factor when refinancing. First, make sure that you have equity since the housing crisis sent so many homeowners underwater. If you do, then check and see what the recent sales are in your neighborhood to get an idea of how much your property is worth and how much equity you have. This is often done just by searching your county property appraiser’s website for recent sales. The perfect amount of equity is more than 20% so that there will be no need for mortgage insurance. However, sometimes, it does make sense to refinance even if mortgage insurance must be paid.
3. How long will I be staying in the home being refinanced?
While every homeowner may not know this answer, many will have an idea of how long they plan to stay in the home. Knowing this information will also guide you in determining whether it is wise to refinance. Since refinancing does cost money, there is a break even period when the costs associated with the loan have been paid by the savings after which it is pure savings to the homeowner. If you are not staying long enough to see the pure savings, it may not be in your best interest to refinance.
4. What are my goals by refinancing?
Most homeowners have one of two goals – either to save money on the monthly mortgage payment or to pay the loan off in a shorter amount of time. Knowing which one is the more important goal will help determine what type of loan and term you will want when refinancing.
5. Are my current loan terms risky?
Many homeowners opt for adjustable rate mortgages when they first purchase a home because the initial rate is significantly low. Some even chose interest only loans in the past when they were available. These are two long programs that are considered risky. If rates are low, it would be wise to consider moving into a fixed rate mortgage when refinancing.
6. Is there a second mortgage on my home?
Very often, homeowners will take on a second mortgage for a multitude of reasons, such as home improvements. If there is a second mortgage, consider consolidating both mortgages into one when refinancing. If this is not possible, be aware that the second mortgage company must subordinate, or take second position, to the first lender. In most cases, this is not an issue unless the value of the home has declined.
7. Will I save money?
The ultimate goal of a refinance is to save money. Whether a savings will be recognized in the short term or the long term will depend on the mortgage rate, the type of loan and the term of the loan. When to save, now or later, is completely up to the homeowner and is determined by their goals.
Considering all of the questions involved and possibilities available, homeowners can be confident that they have made the right financial decision when refinancing.