Mortgage interest rates are trending downward, so the opportunity to refinance the mortgage might have crossed your mind. However, refinancing may not be the perfect solution for everyone. You must think about it deeply and consider all your options before taking this big step.
Here are four questions that you can ask yourself before finalizing your decision.
Things to Know Before You Refinance Your Mortgage
- Is My Current Mortgage Adjustable-Rate or Fixed-Rate? If you plan to refinance because you have an adjustable-rate mortgage, it is the perfect opportunity to switch to a fixed-rate loan. With this type of mortgage, you will not have to worry whether your monthly principal and interest payment will increase or not. Aside from that, there can be penalties tied to your loan restrictions as it can decrease the financial gain of the refinance. It is practical to know and understand the terms of your current mortgage so you won’t encounter future hassles.
- How Much Equity Do I Have In My Home? Wondering about the value of equity is an essential question because buying a house can cost you thrice the amount you expected if you do not know your home equity. You have to have at least 20 percent equity in your home before you are eligible to take a new loan without paying the private mortgage insurance. If the PMI is added to the cost of a new loan, this could negatively affect the benefit of refinancing. If you do not have enough equity in your home, you can opt for a cash-in refinance. This can decrease the balance owed by requiring the consumer to bring money to closing and paying down their mortgage.
- Is My Credit Good Enough? When applying for a loan refinance, you need a relatively high credit score to get approved. No matter how low a mortgage lender might require the credit scores to be, it is safer and cheaper for you to hike up your credit score over time. First of all, most lenders are strict with loan requirements, so you have to have a good credit report to even be considered for an application. Though FHA loans can be helpful for borrowers with credit scores as low as 500, the chances for people at this level of credit are very low in terms of approval. At the end of the day, it is crucial to start building your credit first before you start on taking out refinancing plans.
- What Do I Want to Achieve Financially? Once you have reviewed your current mortgage terms, ensured your equity, and increased your credit score, you now have to determine your reason for refinancing. Paying for home improvements, securing lower rates, lowering monthly payments, and swapping for shorter-term loans are common valid reasons for refinancing your mortgage. Be sure to discuss these reasons with your lender so you can both work on finding a suitable product for your needs. More importantly, take your employment status into account, as your lenders will include this in the evaluation to get a loan.
Refinancing your mortgage should not be an impulse decision. You have to consider many things before you decide that you want to push through with it. Before you make the final choice, start with these four questions and get to thinking.
Apply For a Mortgage Today at Mortgage City
Should you need help deciding about your mortgage, let Mortgage City know. Mortgage City is a licensed mortgage originator based in Detroit, Michigan, as well as Florida and New Hampshire. Give us a call at (248) 930-8709 and let us help you refinance your mortgage!