Your house is a home, but it’s also an investment—and refinancing is one of the best ways to leverage that investment. Homeowners choose to refinance for myriad reasons. Some homeowners want extra cash to pay for home improvements or other investments. For others, reducing loan terms or finding a lower mortgage rate may be the main reason they’re choosing to refinance.
So what does the process of refinancing your loan entail? And is it the right move for you? Here are ten things to consider before refinancing your loan.
1. Know Your Home’s Equity
Before refinancing your home, find out how much equity is in your home. In the current market, chances are your home is worth more now than it was in 2018, but there are exceptions. Not all homes retain value.
Remember, homeowners with at least 20 percent equity have a better chance of qualifying for a new loan.
2. Know Your Credit Score
In general, lenders want to see credit scores of 760 or higher before they loosen their purse strings. You may have a “good” credit score by your own standards, but lenders may disagree. Those with lower credit scores may still qualify to refinance with a higher interest rate.
4. Additional Costs
Refinancing your loan may reduce your interest rate and save you money in the long run. However, refinancing a loan typically costs three to six percent of the total loan amount.
The good news is there are ways to reduce costs. Shop around for a “no-cost” refinance or, if you have enough equity, find out if you can roll those costs into a new loan.
5. Gather Financial Documents
Refinancing is a fairly straightforward process, but it is a process nonetheless. First, you need to apply. As with your original home loan, lenders will investigate your income, assets, debt, credit history, and more, so gather pay stubs and bank statements. You’ll need them.
6. Expect a Home Appraisal
The lender will also appraise your home, so giving it a little preemptive love and attention is wise. Clean up the yard and landscaping, and make your home as presentable as possible. The better it looks, the quicker you’ll cross the approval line.
7. Approval Won’t Happen Overnight
The approval process is fairly straightforward, but it won’t happen overnight. Refinancing your loan generally takes 30 to 45 days.
8. Keep an Eye on Interest Rates
While interest rates have risen despite the Fed’s efforts to combat inflation, they are still historically low. Currently, interest rates sit at around 5.58 percent, and while numbers are up from last year, it may soothe you to know that annual average interest rates reached a staggering 16.63 percent in 1981.
That’s a long way of saying interest rates are still reasonable and fluctuating. So shop around.
9. Shop Around for Lenders
When you refinance, you’re paying off the existing mortgage and taking on a new one. That means you don’t need to use the original lender. Why switch? Other lenders may offer better rates and lower fees.
10. Rates vs. Term
Before refinancing, establish clear goals.
If you simply wish to reduce your monthly payments, shop for the lowest interest rates. Those who want to pay less interest over the length of the loan should shop for low-interest rates at the shortest term. However, if you want to pay off your loan as quickly as possible, shop for short-term mortgages with payments that fit your budget.
Where’s Your Break-even Point?
When we say “break-even point,” we mean the point at which monthly savings cover refinancing costs. To illustrate, consider that you spent $2,000 to refinance your home to save $100/month on your previous loan.
It will take one year and eight months to recover your costs. So refinancing might make sense if you stay in your home long-term. However, if you plan on selling your home in two years, there’s probably no reason to refinance.
Right Start Mortgage: Your Mortgage Experts Since 1989
Contact the expert mortgage advisors at Right Start Mortgage for more information on the refinancing process or request a free personalized rate quote today.