Refinancing Mortgage Tips
Summer is here and with all of the backyard barbeques and other outdoor excursions bringing groups of your neighbors and friends together popular topics on the table will likely include home purchases and refinancing home mortgages. While the bright sun, fresh air, long days, catchy summer music, and good company will intoxicate you and inspire daydreams of lower monthly payments and loads of savings, it is best to avoid being the fool that rushes in despite the peer pressure and high hopes. To help you think before you jump, try mulling over some refinancing mortgage tips first.
There are several things to think about before refinancing. First things first, if you are upside down in your home, you are not going to quality for a refinance. It won’t matter how low the rates go if you have negative equity in your property. Owing more than your property is worth means that your mortgage broker or lender will be unable to offer you a loan that will pay off the balance of your current mortgage.
Find out how much a refinance will cost you. Between application fees, appraisal fees, title fees, closings costs, points, possible prepayment penalties and other random costs, what you end up paying for a refinance may not be balanced out by what you save per month. While you may not have to pay these fees up front and, instead, can potentially choose to include them in the principal balance of your loan, you will then pay interest on the amounts and ineffectually end up paying even more over the lifetime of the loan.
How is your credit? Have you been making all of your payments on time? Have you opened or closed any credit cards recently or financed the purchase of a new vehicle? Getting your credit in order should be a top priority prior to refinancing your home. Not only does good credit help qualify you for a loan but other advantages include better mortgage products and interest rates. Closely related to your credit is your debt to income ratio. If you have increased balances on your high interest credit cards or have financed a vehicle, this may or may not also affect your ability to qualify for a refinance.
Have you been paying on your mortgage for a long time? If you are close to the end of your loan term, refinancing may not end up saving you money. Sure, it may feel like you are saving money if you reduce your monthly payments by refinancing and extending the term of your loan. However, for a conventional fixed mortgage, the loan payback process begins with you paying more toward interest and less towards the principal balance. With each passing year the amount paid toward interest will decrease and the amount paid toward principal will increase. Therefore, the longer you have your loan, the more equity you build in your property. By starting this process all over, you reduce how quickly this equity is built.
Obviously, if you are considering refinancing you have gone through the purchase process and already understand how stressful & complicated home loans are. Reaching out to a trusted loan specialist or personal banker to discuss your refinance options and clarify any questions for you prior to refinancing is always a good idea. Having them map out for you how much you would expect to save per month in comparison to the closing costs and how long it would take before you actually started to save money is another helpful tool as well.
If it turns out refinancing is not for you, don’t let that information crush your summer dreams of saving! Talk to your loan specialist or personal banker about other ways you can save money and build equity. Even applying a small, additional payment toward your principal balance each month can knock a few years off of the term of your loan and save you thousands of dollars in interest!
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