It is a common misconception that homeowners should go for refinancing straight away if the mortgage rates fall. There are many different aspects to this type of deal. On one hand, you have to figure out how much money you will actually save. On the other, you need to decide how well prepared you are for making this step. Find out what factors you need to take into account in order to make the right decision about this major financial move.
1. Interest Rates
The first thing which you need to do is to compare the current mortgage rates to your interest rate. Calculate the difference and how much you will save monthly. You should also calculate the total amount of savings that you will generate. These numbers will give you a general idea of whether the deal is worth it.
2. Closing Costs
You will most certainly save money if you refinance your existing loan at a lower interest rate. However, the closing costs will reduce these savings and you need to calculate by how much. There are various administrative and banking fees that you have to pay. You will most certainly have to pay an application fee and a fee for locking the quoted interest rate.
You have to figure out whether you actually have sufficient savings to cover the closing costs. You should definitely avoid no-cost refinancing. This is because in this case the costs are actually added to the new loan amount. As a result, you will have to pay interest on them throughout the whole term of the loan. This will surely reduce the projected savings.
3. Current Loan Term
If you have had your current mortgage for less than five years, your may have to pay a penalty fee for refinancing. Check to see if such a fee exists in your agreement and how much you will actually have to pay. Typically, these fees are high enough to prevent homeowners from getting a new loan.
If you are close to the end of the term of your current home loan, it may not be wise to refinance. If the new loan has a longer term, you may actually pay more interest even though the rate is lower. Besides, you will have to bear the possible risk of default and foreclosure for longer.
You should check how much equity you have in your home before you decide to go for refinancing. The more equity you have the better your position is. It will give you better chances of qualifying for a new loan. More importantly, you will have to borrow less money and this will help you save even more on interest.
5. Mortgage Requirements
Currently, the requirements for home loans are stricter than before so you have to be absolutely certain that you will meet them before applying for one. You have to have a credit score of 720 or higher in order to qualify for a conventional home loan with affordable rate. Your debt-to-income ratio must not exceed 43%. You must have secure employment income.
You have to be absolutely certain that you will benefit fully from mortgage refinancing before you make this important step.