This is a guest post by Sam Peters. You can also write about refinancing your mortgage.
You’ve seen the commercials and maybe you’ve received letters from your current mortgage lender - everyone wants you to refinance your home loan. And while refinancing may be the furthest thing from your mind, there are sound reasons to seize this opportunity.
Home mortgage rates won’t stay low forever, and this could be your last chance to score a super low rate. Which isn't to suggest you should jump on the bandwagon and refinance just because. But if your current interest rate is more than two percentage points higher than current rates, and if you’re interested in lowering your payment, why wait?
Understand, however, that refinancing a house essentially involves applying for a new mortgage loan. For this matter, there are several factors to take consideration before completing an application.
1. Don't forget about closing costs
This is one of the biggest surprises homeowners face when refinancing their mortgage loan. There’s a cost to just about everything, including refinancing a house. There’s the lender’s fee for originating the loan, the appraisal, the title search fee and other mortgage-related costs. On average, closing costs when refinancing can run between 2% and 5% of the loan balance - ouch!
But there is a bright side.
Ask your lender about a no-cost refinancing and wrap the fees into your loan. This increases the mortgage balance, but limits what you spend out-of-pocket.
2. How long do you plan to live in the house?
Refinancing is attractive but it’s not for everyone. Before you meet with a lender, consider how long you plan to live in the house. Because of refinancing fees, it can take two or three years to recoup your closing costs. Do the math and consider how much you’ll save by refinancing. Next, determine how long it’ll take to break even.
For example, if you spent $3,000 in closing costs and the refinance saves you $150 a month, it will take you approximately 20 months to break even. Therefore, you’ll want to live in the house for at least two years.
3. Your credit score matters
Some people refinance thinking they’ll get approved because they already have a mortgage loan. This is not always the case. Because a refinance is a new mortgage, the lender will order your credit report and check your credit score. To qualify for a conventional mortgage loan, you will need a credit score of at least 680. If you’re refinancing to an FHA mortgage loan, you will need a credit score of at least 620.
Check your credit before meeting with the lender and make necessary improvements. To help you qualify for a refinance, pay your bills on time and reduce consumer debt.
4. Secure the best possible mortgage rate
Mortgage interest rates vary greatly by lender. For this reason, talk to at least three different lenders before completing the refinance process. Start with your current mortgage lender, and then request loan quotes from at least two or three different banks. Refinancing quotes are free and there’s never an obligation to go with a particular lender. Before you make the jump, be 100% sure you've found the absolute best loan rates available.
Refinancing might be the answer if you’re looking to score a better interest rate or convert your adjustable rate mortgage to a fixed rate. Think of what you can do with a lower mortgage payment. Use the savings to pay off debt or increase your personal savings.
Sam Peters is an avid blogger and self proclaimed budgeting whiz. Sam is originally from the mid-west but now resides in sunny San Diego, California. If she is not writing, you can usually find her relaxing with a good book and her wheaten terrier, Kona.
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