Refinancing can be a great way to secure a lower interest rate and reduce your monthly mortgage payments. But those benefits may not really be saving you as much money as it seems. In fact, in some cases, it may not be a smart option at all. So before you refinance your home, make sure you figure out if it really is the right choice for you. Here are 5 things you need to know before you refinance your home:
#1 You Need Home Equity
Home equity refers to the value of your house. This is not the same as the amount you paid for it because in the years since you bought the house, the value could have gone up or down. You should aim to have at least 10-15% equity before you consider refinancing your home. Less than that and you will have almost no chance of finding a mortgage that’s better than the one you have now.
Fortunately, there are a few ways that you can increase your home equity pretty quickly. The best way is to pay extra toward the principle on your mortgage each month. Another great method is to make home improvements that will increase the value of your home.
#2 You Need a Good Credit Score
If your credit score is worse than it was when you applied for your first mortgage, refinancing isn’t going to do you much good. Refinancing is not a way to get out of a bad situation. It’s a way to capitalize on an improved situation. So if your credit score is better than it was back then, this could be a great time to refinance and enjoy lower interest rates. But you need to consider all the factors in this article, not just your credit score.
#3 You Should Get Professional Advice & Support
Even if you feel like you’re in the right position to profit from refinancing your home, there is still the whole complicated process of actually executing the deal. You need to make sure the new mortgage you’re getting really is better than the current one. You need to make sure there’s no hidden fees or terms that will come back to bite you later on.
To navigate these murky waters, you should work with professionals who deal with these kinds of things on daily basis. Find out more about what a great professional service can do for you here. It could mean the difference between saving money and losing money!
#4 Remember that Refinancing Costs Money
If you are doing it under the right conditions, refinancing will save you money. But you still have to weigh the amount of money you will save against the amount you will pay just to complete the refinancing process.
The main costs will be the closing fees on the new loan. But you also need to check the terms of your current loan to ensure there will be no penalties or charges for closing that one out. This is yet another reason to work with a professional.
#5 Make Sure the Rates & Terms Really Are Better
Use a mortgage calculator like this one to figure out how much you will end up paying in the end if you stick with your current mortgage. That is, if you continue to make the same payments at the same interest rates over the term you originally agreed upon. Then, calculate how much you would pay in total under the new rates and terms of the mortgage you are considering (and able) to get. Do you really save money in the long run? If not, it’s not worth it.