Is Refinancing Your Mortgage a Good Idea?
If you are a homeowner with a mortgage loan, you may be wondering whether it is a good idea to refinance. Refinancing can help you save money on interest and monthly payments, and it can also help you build up equity in your home. However, before you do, you should consider a few things first.
Is Refinancing Your Mortgage a Good Idea?
Mortgage lenders typically want applicants with a credit score of 620 or higher. Lower scores mean higher rates, so it is important to improve your credit score to qualify for a low interest rate. You can do this through various means, such as paying down debt and improving your credit utilization ratio.
Is Refinancing Your Mortgage a Good Idea?
Getting a lower interest rate is the primary reason to refinance. However, you should look at the terms of the loan to determine which one is best for you. The lender will take your income, assets and credit history into consideration. Your loan amount will also be a factor, as will the current value of your home.
When looking at a new interest rate, you should also consider the closing costs involved. These fees can range from two to five percent of the loan’s total value. To get an accurate picture of the cost of the refinance, you should request settlement cost papers from your lender.
Another consideration is the time required to break even on your new mortgage. You can usually expect a couple of years before your savings surpass your transaction costs. During that time, you might be stuck in a cycle of high-interest debt.
You should also consider whether you can qualify for a no-cost refinance. A no-cost refinance means that you will not pay any of the fees associated with the refinancing. Lenders define this differently, so it is important to ask about the specific terms offered.
Another way to qualify for a low-interest rate is to switch to an adjustable-rate mortgage (ARM). This can make sense depending on the length of your stay. However, you should be sure to find out if the ARM is fully-indexed.
Alternatively, you can apply for a fixed-rate mortgage. Fixed-rate loans usually have a lower rate than ARMs, and they can be a good choice if you are planning on staying in your home for a long time. Changing to a fixed-rate loan might also be a good option if you are considering buying a vacation property or making improvements to your home.
Besides getting a lower interest rate, you might be able to consolidate your debts. For example, you can refinance your existing home loan with a second mortgage to pay for home improvements, or you can use your home’s equity to pay for other large purchases.
Finally, you should ask about your lender’s prepayment penalty policy. Prepayment penalties can add a significant cost to your mortgage, so you should weigh the cost against the savings. Depending on your financial situation, you might want to avoid refinancing if you are unsure you can afford the prepayment penalty.