Home Owners: How to know when it is Time to Refinance your Home
Refinancing a home is a big decision that shouldn’t be taken lightly. Whether you need to consolidate some debt, would like to lower your interest rate or convert your mortgage into a different type of mortgage, consumers refinance their homes for many valid reasons.
Before you decide whether or not to refinance, sit down for a consultation with a professional and use the following tips to help you make the right decision:
Why Do You Want to Refinance
The first thing to do is determine the reason for refinancing your mortgage. There are two basic types of mortgages that people use. They are adjustable-rate mortgages and fixed rate mortgages. Adjustable-rate mortgages are as exactly as they sound. As interest rates change, so can your mortgage.
A fixed rate mortgage never changes over the course of your loan. You will always be paying the same amount until it is paid off. In order to refinance your mortgage, you need to have a basic understanding of these two different types.
The three most popular reasons include reducing the interest rate, reducing the monthly payment by extending the mortgage, and eliminating debt. You should only refinance during the term of your mortgage to avoid any financial headaches in the future. However, if you can you should consider doing all three of these things provided your personal finances allow it.
A common way to reduce your interest rate is to overpay on your mortgage each month. You don’t have to overpay a large amount. The best approach is just to do what your budget allows. Eliminating your debts should also allow you to set aside more money each month to help you lower those interest rates on your mortgage.
The interest rate fluctuates constantly, so picking the right time to refinance for this reason is essential. This is where it comes in handy to constantly pay attention to the housing market even if you are not looking to buy a new house. Make sure you check rates on a weekly basis and wait until you see a rate you’re happy with.
If you want to consolidate and pay off debt, make sure you know how exactly how much debt you have and whether or not you have sufficient equity to cover it.
Change in the Loan Length and Monthly Payment
Shortening the length of the loan from 30 years to 15 years benefits the homeowner because they’ll be able to pay off the loan sooner.
The biggest factor to consider when refinancing for a shorter term is the change in the monthly mortgage payment. If there is only a slight increase in the amount you pay monthly, then refinancing is likely a good option for you.
Consider Your Credit Profile
Banks use third party credit information companies like SettlementOne to assist with pulling financial background information on refinance applicants. If you have any negative information listed on your credit report, it could adversely affect your refinance rate or even the decision to approve you.
Check your credit report, dispute negative information that is deemed incorrect or wait to apply for refinancing in the future if nothing can be removed. While you might still be approved for refinancing with a few negative credit remarks, you won’t get a low enough interest rate to save money.
Refinance your Home
Always speak to a financial professional before applying for refinancing. Consider all the long term risks involved and perform due diligence on the process and the costs associated with a new loan. In most cases, refinancing can cost between 3 and 6 percent of the principal amount.
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Category: Housing
