Refinancing your home can seem overwhelming, understandably, but it's a common real estate term you should know. Put very simply, it means that you replace your current mortgage with a new one that has better terms—very often, a lower interest rate. This is probably the most common reason that homeowners refinance.
That’s the short version. The longer version is that there are a number of things to consider before you make the final call. And they can indeed impact whether or not refinancing your mortgage is a wise option for you.
Before you get lured in by lower interest rates and numbers that look prettier than what you’ve got now, let’s get into the nitty-gritty of what you need to know about refinancing.
Keep scrolling for the important details about refinancing your home, so that you can make an educated decision.
Refinancing Your Home: 6 Things You Need to Know First
Evaluate Your Credit Score
You likely needed a good credit score to get the mortgage that you already have, and you’re going to need a great credit score to get a better one. Are you looking at a score of 760 or higher? Then you’re probably in a good position for a better interest rate. If, for some reason, your score has recently taken a hit and has yet to recover, you might not get the best rates and terms.
Side note: Your credit history, income, and any existing debt will also be factored in. This additionally means that they’ll possibly look at your debt-to-income ratio, meaning how much of your monthly income goes toward paying off your debt.
The higher that number, the more it could impact whether or not refinancing is the right decision for you.
Consider How Long You Plan to Stay in Your Home
Remember, refinancing your home can save you money, but it still costs money to do (also known as closing costs—more on this in a moment). You need time to recoup those costs. Otherwise, it might not make much sense to move forward with a refinance.
So, if you plan on moving in the next couple of years, refinancing might not be in your best interest.
And on that note…
Calculate How Long It’ll Take You to Break Even
It can take months and sometimes years to recoup the money you initially spent to refinance your home. This isn’t a bad thing, but you should figure out how long it’s going to take you to get that money back.
For example, let’s say it costs you $3,000 to refinance your home. And as a result of the refinance, you’re saving $100 a month. It’s going to take you 30 months to recoup the cost of refinancing. In this case, you should plan to be living in this house for another 30 months, at least.
It’s just about doing a little bit of math.
Also worth mentioning here is that you need to consider whether you’re looking into switching to an adjustable-rate loan or a fixed-rate loan. Adjustable-rate mortgages can increase over time. Fixed-rate mortgages hold steady and offer stability.
If you want something predictable, you’ll want to make sure that what you’re considering switching to is a fixed-rate mortgage.
It’s vital to look at the bigger picture.
Factor in the Closing Costs
You can expect to pay anywhere from 2% to 6% of the total loan amount for your closing costs. It sounds minuscule, but this can add up to thousands of dollars. Ideally, you’ll have this money to simply pay out of pocket so that it’s over and done with.
But what if you don’t? In that case, you can ask about rolling the closing costs into the new loan, which might be an option. Just bear in mind, though, that this means you’re going to pay interest on those closing costs over the lifespan of the new loan.
Sometimes, it can be easy to simply say, “We’ll deal with that later.” But dealing with it later could mean paying a heck of a lot more money.
The point of refinancing your home is to save yourself money. Again, this is why it’s so important to look at the bigger picture and calculate things for the long term.
And speaking of terms...
Consider Your New Repayment Term
In addition to lowering your interest rate, refinancing your home might also mean a new repayment term.
Most commonly, you can choose from a 10-year, 15-year, or 30-year mortgage repayment plan. There are a couple of things to look at, here.
The shorter the term, the sooner you’ll have your debt paid off. However, do you have the extra money in your monthly payment to afford a higher payment?
On the flip side, a longer repayment plan reduces that monthly payment and takes some of that immediate stress off. However, it also means that over the life of the loan, you’re going to be paying more in interest.
These options are here to give you choices and flexibility, but again—and we know we sound like a broken record, but this is important—look at the advantages and disadvantages in both the short and long run.
Factor in Your Refinancing Points
Interest rates aren’t the only numbers you want to look at. You should also consider the refinancing points, which are equal to 1% of the total loan amount. Oftentimes, borrowers will pay these to decrease their interest rate. So, it’s an additional cost to you. Points can be paid either at the closing or they can be rolled into the principal of the new loan (which you pay interest on, remember!).
So, is it a good idea for you to refinance your home?
By now, you probably know that we can’t answer this for you, as it’s not a one-size-fits-all approach. Refinancing offers several benefits, including:
- A lower interest rate.
- A shorter repayment term.
- Switching from an adjustable-rate mortgage to a fixed-rate mortgage.
However, we strongly recommend that you speak with a professional about your own finances, your current mortgage, and whether or not refinancing makes the most sense for you.
Dealing with home matters can sometimes feel like a job in and of itself. That’s why you rely on the professionals. The Brendan King Group is a team of highly experienced realtors, and we have a vast network of professionals ready to assist you with your mortgage needs and beyond. Contact us today.