Deciding to refinance your mortgage can be a good way to make your monthly mortgage payments more affordable without the risk of default. In most cases, you’ll be able to get a better mortgage deal than what you started with, saving you money in the long run.
Before you go about refinancing your mortgage, though, there are 8 things you should consider.
1. You Will Have New Lending Fees
Even if you decide to refinance your mortgage through the same lender, the odds are high that you’ll need to pay new lending fees. These include your application costs, appraisal and inspection fees, document preparation fees, title search, and insurance fees, and recording fees.
While each of these fees plays an important different role in refinancing your loan, they’ll add up quickly. The average cost to refinance a loan is $2,300 and this doesn’t even include the typical 1% loan origination fee. While you may be able to avoid certain fees depending on your lender, you’ll still have to pay quite a bit in order for the refinance to be completed.
2. You May Not Save Money
If you’re unable to secure a cheaper loan or you have high closing costs, you may not actually save money on your refinance. A lower interest rate doesn’t always mean money saved, so you’ll need to pay attention to how much your current loan costs versus how much a refinance may cost.
To help avoid refinancing when it isn’t worth it, use a refinance calculator to determine how much you’ll end up paying or saving. You can compare your current loan information with your refinance information and see if it’s worth the hassle and fees or if you’re better off with your current loan.
3. How Long Are You Planning On Remaining In Your Home?
In some cases, you may not have control over how long you keep living in your home. If you have no current plans to move or you don’t think you will in the future, your refinance may be more or less useful than if you think that you may move in a year or two.
The length of time you plan on remaining in your house will help determine how affordable a refinance is and how much money you may save.
If you paid $2,300 in fees for your refinance and you save $150 a month with it, then you’ll need to remain in your home for at least 16 months before you reach the break-even point. Conversely, if you paid $3,000 in fees and you’re only saving $100 a month, you’ll need to stay there for at least 30 months before you start to benefit from the refinance.
If you already have plans to move, very rarely is it worthwhile to refinance. Since it’s going to cost you quite a bit to refinance, you’ll need to be saving a lot with the new loan in order for it to be worth it. In most cases, it’s best to just keep your current loan if you have plans to move.
4. Your Credit Score Is Just As Important As Before
Remember when you got your original loan and you had to provide your credit score? You’ll need to show it again for your refinance, so make sure it’s as good or better than when you got your first loan. Even if you’ve never been late on a mortgage payment, your credit score will be a key player in how good your refinance is.
5. Your DTI Will Be Impacted
Taking out a new loan, even if it’s just a refinance, will impact your DTI and in turn affect your FICO credit score. Because of this, it’s important to be aware of any current debt you may have: student loans, car payments, and even your current mortgage. You should also be aware of any and all credit card debt that you have across all of your credit cards.
6. Your Home Equity Is Important
Over time, the value of your home will change. Sometimes it changes for the better, sometimes it changes for the worse. Unfortunately, you don’t always have a say in this as the market will always fluctuate and change. While you may be able to increase your equity with home renovations, this isn’t guaranteed to fix all your problems.
During a refinance, you’ll need a new appraisal. This will let you know the new value of your home as well as how much equity you may have built up since you bought it.
This new home value will make up part of your loan-to-value ratio which should be below 80%. As such, you’ll need to have built-up home equity of at least 20% between now and the start of your original loan. If the value of your home decreased since you bought it, this can be difficult.
7. You May Be Able To Stop Paying PMI Or MIP
One benefit of a refinance is that you may be able to stop paying for private mortgage insurance or premiums. This can get rather expensive over time and no longer is required to pay for it is a huge motivation for many homeowners looking to refinance.
In order to get out of PMI payments, you’ll need to have at least 20% equity built up in your home.
8. You Could Use It To Get Cash
With a cash-out refinance, you can take out a new mortgage for 80% of your home’s value even if you’ve already built up more than 20% equity. Any extra money you can take out and use as cash or put towards home improvement projects.
Think Before You Refinance A Mortgage
While a home loan refinance may sound like a great idea, it isn’t for everyone. Depending on your situation, you may better keep your current mortgage and see it through until the end. You may not always realize this before you do some shopping around, though, so be sure to double-check the value of the refinance before you commit to one.