When you’re a homeowner, it’s important to consider how much you’re spending each month on your mortgage. Once rates start to drop, it may be the right time to refinance to ensure you can start saving more money each month. It’s important to understand a few facts before you decide to refinance your mortgage to ensure it’s the right step to take for your situation.
Consider How Long You Plan to Stay in the House
It’s important to think about how long you plan to reside in your home before relocating to determine if refinancing is a good option. Due to the closing costs you’ll owe when refinancing, it only makes sense to refinance if you plan to stay in the house for many years to come. Calculate how long it will take to recoup the fees to ensure you plan to stay in the house long enough. You should only refinance if you plan to stay in the house for longer than one or two years. Use a refinance calculator to determine how much you would save every month
Know Your Credit Score
Knowing your credit score is essential to ensure you get a better rate when refinancing. Your score should be at least 620 conventional mortgage refinance. Some government programs only require a rate of 580. The best candidates for refinancing are those with high credit scores and 20 percent equity in the house after refinancing. The refinance should also reduce the mortgage payment by 0.75 percent.
Consider Your Financial Goals
If your goal is to pay off your home sooner, refinancing may be a good idea because it can allow you to shorten the term of the loan. Shortening the loan can allow you to save a lot more money in interest over time. It can also help you to get rid of FHA mortgage insurance, or you want to switch from an adjustable-rate mortgage to a fixed-rate mortgage to prevent your payments from fluctuating in the future.
Review Your Debt
Keep in mind that you may not get as low of an interest rate with your refinance if you’ve accumulated more debt since you purchased your home. You may have taken out a car loan or accumulated debt on your credit cards. Lenders want to see a low debt-to-income ratio of 43 percent or less to ensure they can trust that you’ll repay the loan and can afford to borrow the money, even if you already have an existing home loan.
You may want to repay some of the debt you owe or wait until your credit score increases as you continue to make your payments on time. Boosting your credit score and reducing your debt can make you appear more qualified to refinance.
Consider Other Types of Loans
It may also be time to consider other types of loans when you refinance. You may want to switch loans to get rid of private mortgage insurance. You may also switch to an ARM from a loan with a longer term to save more money over time because this type of loan often comes with lower interest rates.
There are many reasons to refinance, aside from wanting to save more money each month. Knowing why you want to refinance can allow you to determine if it’ll be beneficial and is the right choice.