Refinancing your home is a legally binding contract and a debt that you are getting into. It should be taken only after you've given it critical thought, time, and research. Before you refinance, you have to be certain that refinancing is the best deal for you and your unique financial situation.
Critical Factors To Consider Before You Refinance:
1. What It Means to Refinance.
Refinancing your home means setting aside your original mortgage to sign a new one. This new mortgage amount may incorporate the balance on your current mortgage and its interest amount.
For instance, if you originally borrowed $230,000 for your home purchase and since then have paid enough so that you currently only owe $200,000 on your mortgage, to refinance means to set aside that original loan and ask the bank to lend you that $200,000 as a new loan.
2. How Long do you Plan on Occupying Your House?
You need to consider how long you plan on living in your house. Refinancing your house can cost you quite a bit of money. While the lower rate will save you on monthly mortgage payments, it may take two or three years before you realize those savings because of all the fees involved. If you do not intend on staying in your home for long, then it may be wise to think twice before you refinance.
3. Would Choosing an Adjustable Interest Rate be Smart?
If you are thinking about choosing to refinance home loan with an adjustable interest rate (ARI), you may want to think long and hard about that. You would be better off in most cases opting for a fixed interest rate.
The benefit of the latter choice is that you'll always be in the picture of how much each monthly payment is going to be. You don't have to worry about unexpected rises that are costly for you. Adjustable interest rates are one of the factors that have contributed to the current foreclosure crisis in the real estate market.
4. Will You Save Money by Refinancing?
Although you could refinance home loan balances to save money, it’s not a guarantee that you can cut down your bills this way. Before you refinance, you have to scrutinize the details of the refinancing to ensure that your payments will be lowered.
You will no doubt spend more in the long-term due to the increased years of interest payments over the initial terms of the loan. However, you may lower your costs for monthly mortgage payments which could greatly help if you're struggling to make those payments at the moment.
5. Is This the Best Time to Refinance?
You should consider the existing interest rates and decide if it is the best time to refinance. When you see those rates are below your current rates, you may want to consider choosing this option. You will save so much money even if the interest rate falls by only a couple of percentage points. However, there may be other factors that would make this a bad time to refinance.
6. What Costs Will I Bear?
Although you could save money if you refinance home loan debt, you can also factor in having to pay some fees up front. For instance, your home will need to be appraised to make sure its value warrants the cost of the loan.
You'll also have to cater for closing costs and title fees. In rare occasions, you can still find lenders who will incorporate those expenses into the cost of the loan, but that's only going to be more costly in the long run. Before you refinance, keep in mind that you'll end up paying interest on those fees also.
7. How is Your Credit Score?
You are going to need a great credit score to be considered for a refinance loan. Credit requirements have become so stringent (due to the subprime crisis) that even a refinance is seen as a new loan, making it prohibitive to get.
8. Get a Second Opinion.
Before you refinance, it's often worthwhile to seek advice from a certified financial consultant or any other financial expert who has no hidden agenda when it comes to your refinancing decisions. This is particularly true if you are a first-timer who requires guidance on real estate issues.