Mortgages are essential for every home purchase. But unfortunately, most Americans can’t buy a home through cash, especially with the current prices of homes reaching record-highs. So if you’re planning to buy another home or property this year, it might be wise to refinance your previous mortgage to get a better deal. But what is refinancing?
Refinancing a Mortgage
Refinancing is taking out a new loan to pay off an existing mortgage. This usually happens when interest rates drop, or the borrower wants to change their loan terms. For example, you may want to refinance from a 30-year fixed-rate mortgage to a 15-year fixed-rate mortgage.
The main benefit is that you can take control of your loan. You can decide how much you need to pay and when to pay. But there are a few things you should know before refinancing your mortgage. Here are five of the most important:
You’ll Need Equity in Your Home
Home equity is the part you already own from your home. When you’ve paid off your home entirely, you have 100% equity of your home. If you’ve only paid half of your home, then you have 50% equity. In order to refinance, you’ll need at least 20% equity in your home.
However, experts believe you should only consider refinancing if you’ve gained 50% or more of your overall home equity. The main reason is that it’ll be easier to get approved for a new loan, and you’ll likely get a lower interest rate. You’re also in a much more favorable position than refinancing a home that you only own partially.
You’ll Need a Good Credit Score
A credit score is the “likelihood of a borrower repaying a loan.” You’ll need to have a good credit score to get approved for refinancing. A FICO credit score of at least 700 is ideal, but some lenders may approve you with a lower score. However, some states require at least a FICO score of at least 750 to get a loan.
Still, the higher your credit score is, the better. A high credit score means you’re a low-risk borrower, which is exactly what lenders are looking for. It also means you’re more likely to get approved for refinancing and will be offered a lower interest rate.
You’ll Need to Pay Some Fees
You’ll likely have to pay some fees when you refinance your mortgage. These can include an application fee, origination fee, appraisal fee, title search fee, and more. You may also be required to pay points, an upfront fee equal to 1% of the loan amount.
These fees can add up quickly, so it’s important to factor them into your decision to refinance. In some cases, the costs may outweigh the benefits of refinancing. Make sure to make the calculations beforehand when doing it. Also, it’s important to note that some fees might depend on your state.
You’ll Need to Shop Around
Experts suggest shopping around for refinancing options, much like you’re making your first home loan. Not all home lenders are created equal. Some may offer lower interest rates, while others may have higher fees. It’s essential to compare offers from multiple lenders before making a decision. You can easily use an online tool like Credible to compare mortgage refinance offers.
Moreover, you can ask for help from professionals to help you out. It’s the sure way you can get the best deal for refinancing your mortgage.
You Might Not Save as Much Money as You Think
Refinancing can be a great way to save money on your mortgage, but it’s not always the case. In some instances, you might not save as much money as you think – or any money at all. This is especially true if you only plan to stay in your home for a few more years.
When you refinance, you’ll need to consider the fees you’ll have to pay as well as how long it’ll take you to break even. For example, it might not be worth it if it takes you several years to recoup refinancing costs.
Additionally, keep in mind that interest rates are constantly changing. Just because you lock in a low rate today doesn’t mean it’ll still be low a year from now. Refinancing might not make sense if you’re not planning to stay in your home for the long haul.
Refinancing your mortgage can be a great way to save money, but don’t rush to do it immediately. Always ask around for better rates, and consider the option of saving instead. Unfortunately, it’s not always you can save money from refinancing your previous mortgage.