Refinancing Do’s and Dont’s

Family looking at house

By Ted Lyons, Brighton Branch Manager

Refinancing your home can be a great financial tool to lower your interest rate, shorten the loan term, decrease your monthly payment, or convert one sort of asset (equity in your home) into another (cash in your hands). Here are some tricks of the trade that can help you take advantage of this strategy:

What are the two basic reasons I might refinance my mortgage?

With some limited exceptions, most people refinance their home to lower their interest rate, shorten the term of their mortgage, or decrease the payment by extending the loan over a longer time (rate/term refinances). There are also instances where it makes sense to utilize the equity from one’s home, in order to help accomplish both financial and personal goals – such as cash out refinances.

  • DO: Understand that interest rates are frequently higher for cash out refinances than rate/term refinances.
  • DON’T: Rely on rates you see online – talk with a local lender who can help you learn what rates are available in your specific circumstances.

How do I know if refinancing my home is an option for me right now?

Two of the most important things to understand when you are considering refinancing your home are – how much do I owe on my home now, and how much is it worth?

  • DO: Look at your most recent mortgage statement(s) to know how much you owe. Ask a lender that you trust to help you develop an estimate of your home’s value.
  • DON’T: Guess how much you owe or think your home is worth based on what your neighbor’s just sold for.

What factors influence the rate on my new mortgage?

The factors that determine your new rate are: credit score, payment history, and how much of the new mortgage represents your home’s value.

  • DO: Know that there is a chance that your new rate might be higher than your existing mortgage rate – but particularly if you are paying off other higher-interest debt, or spreading your payments over a longer term, refinancing still might make sense. Consult a trusted lender to learn your credit score, and what you can do to make sure it is as high as it can be. This will almost certainly give you the best rate possible and put you in the best position to move forward.
  • DON’T: Assume that just because some of the factors are not in your favor today, refinancing will never work for you.  Working on your credit score, having your home increase in value, or having interest rates change might mean that a refinance that doesn’t make sense for you now – might in the future.

Refinancing your home can be a smart move for you.  It may be complicated, but it should never be mysterious – just make sure to pick the right lender to have in your corner!

One response to “Refinancing Do’s and Dont’s”

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