Refinancing your home loan when interest rates are low may seem easy. Refinancing your home loan is a risky financial decision that has many benefits. These are the questions to ask before you make the decision to refinance your mortgage.
Are you able to invest enough equity?
Refinancing at lower rates is a good option if your home is worth more than what you owe on the mortgage.
Is your credit rating good enough?
Refinance your mortgage requires the same income as the original mortgage. Credit history that has been damaged in the past may make it difficult to get a new mortgage.
What length of time will you be staying in your current house?
Refinance is when you close your current loan and take out a new one. You may need to pay for title insurance, property appraisals and other costs. Calculate how long it will take for the monthly savings from your new interest rate “to pay off” these expenses. Refinancing is not recommended if you plan to move soon or fear that you might outgrow the house. The closing costs will likely be less if you move within the first few years of refinancing.
What rate reductions can you get?
Refinancing is not a good option if you are unable to lock in a rate reduction of at least one half of 1 percent. Refinance is recommended by many financial experts when your rate is at least two points below your current mortgage rate.
ADVANTAGES IN REFINANCING
Save money.
You can reduce your monthly payments or total loan debt by lowering your interest rate or loan term (or both). This will save you money each month. However, it can also have a bonus benefit: If you are able to pay other bills more easily, you can lower other debts and improve your creditworthiness.
Property value increases.
A cash-out refinance is a great way to borrow money for large expenses or purchases, such as home renovations. This can help you increase the value of your house while your mortgage is decreasing.
REFINANCING RISKS
High closing costs.
Focusing only on the new mortgage interest rate is not the best way to see the whole picture. Closing costs may be as low or high as hundreds of dollars, but they can also run into the thousands. You can save money by comparing rates, terms and closing fees.
Value lost.
Some homes do not increase in value. A refinance appraisal will show this. It will also affect the terms and rates that lenders will offer.
It is difficult to understand or read the loan documents.
There could be 50 pages worth of legal documents that you need to sign when it is time to close your loan. You should carefully review them, and ensure there are no errors or inaccuracies that could cause you to lose a lot of time or money.