Refinancing Your Mortgages? Ask Yourself These Fundamental Questions First
Purchasing a home is a big decision – but the decision does not end with just buying the property. Constantly looking for ways to improve the investment is important, and that includes refinancing. Refinancing allows homeowners to modify mortgage terms and enjoy better interest rates or payment terms.
But, before you start shopping for a refinance, you should first ask yourself these four important questions. With that said, here are some fundamental questions to ask prior to refinancing your mortgages:
Do You Have Clear Refinancing Goals?
Refinancing could be motivated by different reasons. It could be to save on monthly payments, shorten the loan term, or even acquire cash from equity in the property. Whatever the reason, you need to identify what your end goal is.
If you are looking for mortgage refinancing for the first time, doing research and making financial calculations will help you decide how much you could save on monthly payments. Ideally, it can help you reduce borrowing costs through interest rate comparisons.
Do You Have a Good Credit Score?
Credit scores have a significant impact on their ability to obtain loans and negotiate better terms. Most lenders will require a minimum credit score of 620-640 to refinance. But better rates can be achieved by having a score of over 740.
So, it is ideal to gauge your credit score prior to refinancing your mortgages. You can check and monitor your credit score for free on websites like Credit Karma, Credit Sesame, or AnnualCreditReport.com.
What Type of Loan Do You Need?
There are various types of loans available based on the goals discussed in Question 1 and the current market rates. For example, a fixed-rate mortgage means you will receive a single interest rate for the life of the loan, while adjustable-rate mortgages will initially offer a lower interest rate but change periodically based on the market and other factors.
However, most homeowners are opting for cash-out refinancing these days. This means taking out a loan value greater than your current borrowing amount and then utilizing the extra funds for home improvements or settling high-interest debts.
Can you Afford the Refinance Costs?
Though refinancing looks attractive due to cutting down on costs or interest rates, reaching that final goal will have different costs attached to the process. For example, appraisal fees, origination fees, closing costs, and attorney costs. Plus, other fees may end up totaling between 2% to 6% of your total loan amount.
So, you need to do the math and calculate if the amount saved from refinancing will make up for the costs. To make sure you get the best deal, always consider getting several quotes from different lenders.
The Final Word
Deciding to refinance your mortgage is an important financial decision for homeowners. But you should always consider your goals and the overall financial impact it will have before making a final decision.
Knowing your credit score, evaluating the available types of loans, and knowing the costs will help you make an informed decision. With the right information, a little research, and a trusted lender, refinancing your mortgage can save you a significant amount of money.
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