Refinancing a mortgage is a great way to lower your monthly
payments and reap serious savings. And given the way today's refinance rates
are trending, many borrowers are finding that now's a great time to get a new
home loan. But before you rush to jump on that bandwagon, make sure to tackle
these key items.
1. Do an interest rate comparison
Today's refinance rates may be low, but what if you're
already paying a low interest rate on your mortgage? In that case, refinancing
may not make sense due to the fees involved.
Generally, refinancing is a good idea when you can shave
about a full percentage point off of your mortgage. This means that if you're
paying 3.85% interest today, you'd ideally want to refinance to a loan at 2.85%
interest. Of course, that 1% savings target isn't exact -- there's a little
wiggle room. But if you're paying 3.25% interest, it generally doesn't make
sense to refinance to a 2.85% interest rate.
2. Figure out how long you plan to stay in your home
The average U.S. homeowner paid $5,749 in closing costs in
2019. Closing costs are unavoidable when you refinance a mortgage, and though
they're not set in stone -- each lender establishes its own fees -- they can
eat into your savings. In fact, you won't really save any money on your housing
payments until you break even from your closing costs. So if you're not
planning to stay in your home very long, refinancing could end up not making
sense.
Say your lender wants to charge you $6,000 in closing costs
to refinance, but in doing so, you'll lower your monthly mortgage payment by
$250. That means it will take 24 months for you to break even and start
enjoying some monthly savings. If you plan to stay in your home another three
or four years, that refinance is worthwhile. But if you think you might move
within two years, then you shouldn't refinance because you could end up losing
money in the process.
3. Make sure you're a solid borrowing candidate
Having an existing mortgage doesn't mean you'll
automatically qualify to refinance. In fact, if your credit score is poor and
you've racked up a lot of debt since initially signing your mortgage, you may
not get approved to refinance at all.
Before you apply, see what your credit score looks like.
Keep in mind that if you want a competitive refinance rate, you'll generally
need your score to be in the mid-700s or higher. You'll also need to make sure
your debt-to-income ratio isn't too high and that you have a steady job to make
lenders comfortable with the idea of giving you a mortgage. See where your
finances stand before applying for a new home loan because you may have some
work to do before taking that step like boosting your credit score.
There are plenty of good reasons to refinance a mortgage
today, but don't assume that doing so makes sense for you. It could be that it
pays to wait on refinancing until your circumstances change or rates drop
further (which may or may not happen). The key is to assess your own situation
and needs before rushing to swap your existing home loan for a new one.
A historic opportunity to potentially save thousands on
your mortgage
Chances are, interest rates won't stay put at multi-decade
lows for much longer. That's why taking action today is crucial, whether you're
wanting to refinance and cut your mortgage payment or you're ready to pull the
trigger on a new home purchase.
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