Steps to take before you Refinance
Are you taking note of the low interest rates and thinking about refinancing your home, you should know exactly what it is and how it could benefit you. Essentially, refinancing is the process of getting a new mortgage to replace your existing one. The new loan pays off the first and could give you a new interest rate, new monthly payment, and a new term length. Usually, people refinance to reduce their interest rate on their loan. This means that when you reduce your interest rate, you’ll also lower the cost of borrowing money and therefore save money. Refinancing could also help you go from a 30-year loan term to a 15-year loan, switch from an adjustable-rate mortgage to a fixed-rate mortgage, and consolidate your first and second mortgages, and a great deal more. So, contact a mortgage lender, and find out how you could benefit from refinancing.
Do you know what your credit score is? If not, you should probably get on top of it because having a good credit score is important when it comes to refinancing. Your credit score determines whether you qualify for refinancing, as well as what kind of interest rate you’ll get. Generally, the higher the score, the lower your rate and to get the historically low rates now available, you’ll need a very good score: 720 or above which is a scale of 300 to 850. So, it may take time to build up your score into the positive, but if you make sure to pay all bills on time and pay down as much debt as possible, you’ll definitely be going in the right direction.
Equity is something else you’ll want to become familiar with, too. Because equity – the difference between the current market value of your home and the amount you still owe on your mortgage – plays a part in determining whether or not you can refinance. Lenders normally want you to have at least 20 percent equity in order to refinance. There are still options out there for those with little or no equity, according to Making Home Affordable (MHA), an official program of the Department of Treasury & Housing and Urban Development.
For you, the whole point of refinancing is probably to save money by lowering your interest rate, which, remember, is essentially the price you are paying to borrow the money. And because there are costs and fees associated with refinancing; you need to make sure you lower your rate enough to make refinancing worthwhile. Generally speaking, if you can lower your rate by three-quarters of a percent, refinancing is worth considering. One important point to note is that the more fees and costs you pay up front or out of pocket, the lower your rate may be. Similarly, you could also have the option to take a lower rate and then add the amounts you would pay for fees and costs into the amount you borrow.
There are other costs and fees associated with your loan, known as closing costs, and it’s important to make sure that the refinancing savings outweigh them. To help you better understand what closing costs involve, here’s a brief breakdown of some of the more common major fees, although they could change from lender to lender: Loan Origination Fee, Application Fee, Points, Appraisal Fee, Lender-Required Home Inspection Fees, and Private Mortgage Insurance (PMI) If you are borrowing more than 80 percent of the market value of the home.
More importantly if you’re planning to stay in your home for at least a year to two years after refinancing your mortgage, it’s probably worth it to refinance. Why? Because of those closing costs we mentioned. Essentially, since getting a new loan costs money, it takes time for the savings to outweigh the costs.