Steps to Determine Whether Home Refinancing is Right for You
In the past six years, millions of homeowners have taken advantage of low interest rates, refinanced their homes and saved tons of money each month.
Some homeowners who locked into new loans before interest rates hit their lowest point wonder if the current drop in interest rates means they should refinance again. Others might be interested in refinancing to take out equity to pay debt, send a child to college or add on to the house. Some refinanced before at a higher rate because of credit issues.
If you are pondering a refinancing now or even refinancing again, the following steps will help you decide:
- Realize there are no hard and fast rules of thumb. Conventional advice has been that homeowners should take out 30-year mortgages and refinance only if interest rates drop by at least two points. That advice isn't necessarily valid. If you don't plan to move for several years, a drop of one point could serve you well.
- Find a mortgage broker who really listens to you. Be wary of salespeople who start by quoting interest rates. They're not trying to understand variables in individual situations, which include how long you expect to be in the house, your credit score, your cash flow and how soon you want to pay off the house. A good broker or loan officer will take the time to talk to you about your situation, listen carefully and then describe options that will help you make your best decision - even if it means not to refinance.
- Get a written statement of all the fees and costs before you agree to anything. Add up the total cost and divide by the total dollars you will save each month. This number will tell you how many months you need to live in your house in order to really save money. If you plan to move in the foreseeable future, the cost to refinance should be less than the total amount you will save over that same period of time.
- Check your credit score. If your score is around 675 (close to the national average), you may want to wait and work hard on raising your score. A higher score could save you hundreds of dollars each month.
- Evaluate your spending habits. If the main reason you want to refinance is so you can use home equity to pay off higher interest credit card debt. You may be making a dangerous decision. You could end up losing your house if you get behind on paying for your house the way you got behind in paying for your credit card purchases.
- Minimize your closing costs. Check every charge in the loan documents you receive before signing anything. Ask if each one is essential and if it can be reduced. Also ask if you qualify for a discount on your title policy. This could save several hundred dollars.