For a homeowner, refinancing is something that can come along as either an opportunity or a necessity. But whichever one it is, it is a big decision that will require a lot of thought and research. Many people are aware that refinancing is an option but are confused about where to start or whether it is their best path. If you are considering refinancing your home, here are a few basics that you should know first.
Why do you want to refinance?
Before you do anything else, you must first evaluate the reasons behind your desire to refinance.
There are a few reasons why you might be considering this option:
- To lower your monthly payment
Sometimes interest rates drop, and you might find that you can refinance in order to lessen your monthly mortgage payment. However, you might have a problem here if you owe more than your house is worth. You may also want to make sure that your interest won’t be higher as the result of your lower monthly payment.
- To lower your total costs
Sometimes refinancing can be the best way to pay off your loan faster, and thus lower the overall cost of your house as you pay less interest. Be careful if this is your reason, as refinancing to a shorter term loan might also increase your monthly payment—in which case it may not be worth it unless you are eager to pay off your loan quickly.
- To switch mortgage types
Switching from an adjustable rate mortgage (ARM) to a fixed rate mortgage is one reason to refinance. This can make mortgage payments simpler and easier to deal with in the long run. It can also protect you against potential rising rates.
- Cash out
This type of refinance involves using your house to get cash for other purposes. If this is the reason for your refinance it will take a little bit more consideration. Make sure that your new mortgage is still affordable, and that you are seeking cash out for an essential reason, otherwise you may run into serious trouble in the long run.
What will it cost you?
This is probably the biggest question that any homeowner is going to have about refinancing. If you are looking to save some money, you may want to avoid any fees where possible. Here are some aspects of refinancing that may cost you money:
Check out the fine print on your current mortgage. If you are not sure what it means, have a realtor or lawyer look at it. There is a chance that there may be some penalties involved for paying it off early. If this is the case, it might not be cost effective to refinance.
– If you owe more than your house is worth
Houses can decrease in value. If you owe more than your house is worth, you might end up having to pay the difference yourself, and that may make refinancing a less attractive option.
When it comes down to it, you need to be aware of all of the potential costs before you can make a proper decision on refinancing. Once you have considered all of the possible outcomes, you can then make a well informed decision. If you are looking to cash out, your purpose is to get more money immediately, so it will obviously cost you a little more in the long run.
How long are you going to stay in your home?
A lot of your decision-making will depend on how long you intend to stay in your home. If you intend to move in a few years, refinancing with an ARM loan may be a good option or not refinancing at all may be best. If you intend to stay in your home for a very long time, an ARM might not be the best idea, but refinancing to a fixed rate may help you in the future.
What are the first steps?
So you have weighed up all of your options and you now know for certain that you want to refinance. What do you do now? First, you need to make sure that you will be able to refinance. You will need a good credit score and also enough equity in your home—this might be 10 or even 20 percent of your home’s value. You also need to have proof of a good source of income and steady employment. After this, you should check your current mortgage for any possible penalties for paying it early, and make sure that they will not outweigh the benefits of refinancing.
Next, you will need to shop around and find the best loan. Do not settle for the first offer that you receive, no matter how good it may appear. Sometimes it is best to simply stick with your original lender, but you should not do this without at least checking out the competition. You can also use a refinance calculator to see what sort of deals you can be expecting. Refinancing sounds like a scary process, but when you boil it down to the basics, it is actually quite simple, and it could really help you out in the long run.