Time to refinance? Well, how do you know? Are you prepared? Are you looking to decrease your monthly payment or pay off bills? Maybe work on a home improvement job or just lower your terms. If you’ve been toying with the idea of a refinance, here’s how and why to do it.
You’ve probably already been discussing why you want to do it. If you’ve lived in your home for some time and you haven’t refinanced in the last five years, you might be considering a refinance to lower your interest rate, pull out some equity, or simply refinance for a better term rate. Perhaps you’ve gotten a better job and would like to pay off your home earlier. Converting your 30-year loan to a 15-year loan might be the best way to go about doing this. This would only be smart if you have more than 15 years to pay on your mortgage.
We recently worked with a couple that had been paying on their mortgage for about 10 years and wanted to refinance to a 15-year mortgage. They were also paying on a second mortgage so we were able to combine both mortgages and decrease their term yet only increasing their monthly payment by about $75. This would save them thousands and thousands of dollars over the life of the loan and the home will be paid off five years earlier.
If you want to get the very best possible interest rate start by planning and preparing months ahead. You could raise your credit score, lower your debt, increase your home equity and have cash reserves that aside, which can all be a benefit to applying for a refinance. You want to organize all of your financial documentation, make sure you understand your credit history, report and have all of your assets and liabilities mapped out so you know exactly how much you owe, how much income you have, and what you plan on doing with that money.
Run the numbers. You want to make sure that this is worth your while. If it cost $3000 to refinance in closing costs and you’re not saving that money or it will take you a long time to recoup the money, it might not be a wise idea to refinance. However, if you plan on skipping a payment or two during that refinance time, that could be the money needed for closing costs.
A big mistake that a lot of people make is settling for the lender’s appraisal. When you go to refinance the mortgage broker will ask what you think your home is worth. If you over exaggerate this you may not be able to get the loan. There usually has to be an 80/20% rule, meaning that you need at least 20% equity in your home in order to refinance. You have the option to choose your own appraiser, but it has to be a professional and licensed appraiser. You are also free to pay for an additional appraisal if the debt to loan ratio is awfully close.
Speak with your mortgage officer about the best time to close. The couple I spoke about earlier was able to actually skipped two mortgage payments, saving that money for the appraisal, the refinance costs and putting a little into the bank. It all depends on when the application goes through and when you plan on closing. Creative planning could stretch out the closing for a couple of months, helping you to skip a couple of mortgage payments.
If refinancing is your best option make sure you’re not digging yourself deeper into debt without having some sort of benefit on the backend. If you’re simply refinancing to pull out money in order to pay off credit cards, a student loan or go blow down at the local casino, this might not be the best or the wisest move. If you’re paying off credit cards with a home equity line of credit consider that you’ll be paying years on this loan now instead of the five or six years it would take to pay off that credit card.