With recent market fluctuations, many consider now as a good time to refinance their mortgage. Below are some questions to ask yourself prior to taking the first steps so that you are able to better evaluate whether this is the right choice for you.
1. Do I Have Enough Equity?
One of the first major considerations is to evaluate whether you have paid-off enough of your home in order to make refinancing a good financial decision. With the changes in the market, many find themselves owing more on their homes than what it is currently worth. A good rule of thumb is to have at least somewhere between 15 and 20 percent equity in their current home to increase chances of being approved for refinancing.
2. Do I Have a Good Enough Credit Score?
Having a low credit score can also throw a wrench in your refinancing plans. Currently, many are finding that they are still denied, regardless of having a pretty solid score. The reason for this is that lenders have become even more strict when it comes to their lending criteria. For the best possible mortgage rates, you should aim for a credit score of at least 720. Having a score slightly below that may also get you approved, however, be aware that your interest rates will likely not be as favorable.
3. What is my Long-Term Financial Plan?
Creating a graph or utilizing a mortgage calculator will help to keep track of specific future expenses and will help to eliminate surprises or frustration. What are your monthly goals for setting aside money for retirement, or kid’s college funds, for example? Calculate when your home will be paid off. Will you still be living there? For many, if you are planning on staying in your current home for only a couple of years, then refinancing may not be a worth while decision.
4. What are the Actual Refinancing Costs?
Initially, many look at the money they could save with their refinance without considering the actual cost of the process! Be aware that when shopping for lenders that most will have you pay between 3 and 5 percent in fees of the overall lending amount. However, typically, you can absorb those fees into your new mortgage but it is a cost to keep track of, nonetheless.
5. Do I have Anything in my Current Plan that can Complicate Things?
Check to see if you have a unique circumstance that could complicate your future plan. Some people who have a second mortgage, for example, might face additional complexity when trying to refinance. Consider which option is more appealing, either paying off the first loan in its entirety or combining the two. Some lenders might have specific rules or restrictions regarding multiple mortgages so it might be a good idea to put that in your research criteria when shopping for lenders.
Hopefully the above questions will help to get you started on deciding whether refinancing is the right decision. Taking the time to organize and research will in the end potentially save you good money in the long run!