Refinancing your mortgage may seem like a godsend at the moment, but before you jump in headfirst, there are some things you should know. For instance, are you prepared to shop around with at least three different lenders and three different title companies? Even though you might do less paperwork with your current lender, others might be able to offer you better rates, so it's definitely worth checking them out.
Here are some of the other things you should think about with a refinance.
There may be extra fees involved
All too often homeowners get caught up in that one little number – the interest rate. Sure, a drop of a half a percentage or more can save you big bucks on your monthly payment and on the total interest you'll pay for your home. However, you have to remember that refinancing comes with some of the same fees involved in buying a home originally, so the interest rate change may not end up saving you all that much after all.
Another thing to consider is something plaguing homeowners today: do you owe more on your home than it's worth? A high loan-to-value ratio these days can mean extra fees for your refinance, as the company doing your refinance has to protect itself, too. You might even end up paying private mortgage insurance, which can increase your monthly payment by $100 or more a month.
So, before you refinance, make sure you look at all the numbers and take everything into account. Unless you're getting significant interest rate savings, the refinance may not save you that much money after all.
You could tack more years onto your mortgage
Another thing to consider with a refinance is what loan term you'll use for the refinanced loan. Many homeowners who have been in their homes for five years or more take out another thirty year loan, not considering that it will be yet another five years before they pay off the house. Thirty-five years is a long time to be paying on one home!
In some cases, a longer-term mortgage may make sense, especially if the lower monthly payments mean keeping your home instead of going into foreclosure. In some cases, it may be in your best interest to pay extra on another thirty year mortgage, which will pay it off earlier and save you money. However, in many cases, it's better to take out a shorter-term loan – like a fifteen or twenty year – depending on how much you have left to pay off after the refinance.
Just keep in mind that by taking out another thirty year loan, it will take you some time to get traction in your mortgage and start paying off the principle significantly, so this is really only a good option if you plan to stay in your home for a while.
Find your break-even point
The best way to determine whether or not a particular mortgage deal is a good one for you is to find your break-even point. This is the point at which the extra costs of refinancing will break even for you. If you plan to be in your home through or well past your break-even point, then a refinance could be a good option for you. If not, though, it's probably better to hold off and just sell the house when you're ready.
There are plenty of great online calculators that will help you determine your break-even point with the best refinancing deal you can find.
Keep your credit score up during the refinance
Finally, just like when you're buying a house, when you're refinancing, you need to be sure that your credit score stays up the entire time – until your rates are actually locked in. Most lenders will quote you a rate at the outset of the refinancing process but will check your credit score again before locking in that rate.
One of the best ways to keep your credit score high during a refinance is to cut back on credit card usage. Use your cards responsibly, and pay off new balances every month. If you can, try to pay down your balances a little, too, so that your credit score is even a little higher at the end of the refinancing process than it was at the beginning!
This is a guest post by Katheryne Taylor.
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