5 Things to Consider Before Refinancing your Mortgage
Posted on August 05, 2019
By Dwayne Holt, Mortgage Lending Director
The landscape of mortgage refinancing frequently shifts, and if the circumstances are right, homeowners should strongly consider this financial move. But what factors should go into that decision?
When you’ve accumulated some equity in a house, it can be beneficial to refinance and save money on the loan, though the equity can also be used for debt or purchases.
A common way to save money by refinancing is to find a loan with a lower interest rate, and while important, it should be just one of the considerations. Consumers have historically been told that at least a two percent interest rate decrease is required to make refinancing worthwhile. Today, some sources say one percent can be enough.
As interest rates gradually climb, lower rates become increasingly difficult to find. But the key to successful refinancing is more than simply a lower rate, though that should be a factor. Consumers need to carefully assess their individual situations with a long-term perspective.
For example, if the homeowner originally opted for a 30-year loan with relatively small monthly payments but is now in a better financial position to make larger payments each month, it might make sense to refinance with a shorter term. The interest rate might not be significantly lower, and monthly payments may increase, but the homeowner will save money on interest over the shorter lifetime of the loan.
Perhaps a current loan is structured to include a balloon payment at the end, and the homeowner wants to refinance to restructure the loan terms. Or, consumers may have a genuine interest in putting the equity in their home to use to pay off debts or pay for home improvement projects, in which case a cash-out refinance would be attractive.
Consumers shouldn’t dismiss the idea of refinancing just because of the current interest rate environment. Here are some tips to help your decision-making process.
Make sure refinancing is the right choice for you.
Refinancing isn’t the best option in every situation. Before beginning the re-finance process, make sure you know the rate and term of your current mortgage, as well as how that compares to present rates at various terms in the market. It’s important to understand how much you could save before proceeding
Understand why you’re refinancing.
Have a clear goal in mind when you refinance. If you want to free up money in the short term, you may want to consider shopping for a loan with a significantly lower interest rate or monthly payment. If you can afford larger payments each month and want to save over the life of the loan, shopping for a shorter-term loan may make more sense.
Raise your credit score.
Make sure your credit score is in good shape before deciding to refinance your mortgage so you can get the best possible interest rate. A credit score in the mid-700s will serve you well. To raise your credit score, pay down credit cards, make on-time payments, and avoid taking on new debt before refinancing.
Buy mortgage points.
Homeowners can buy mortgage points, also known as discount points, to reduce the interest rate. Mortgage points are fees paid directly to the lender at closing in exchange for a lower interest rate. One point costs one percent of your mortgage amount – so $300 on a $30,000 loan. “Buying down the rate” basically allows you to pay some interest up front to achieve a lower rate over the life of the loan.
Find a loan originator you trust.
It’s more than just the interest rate – you want an originator who understands the “big picture” for you and can tailor a specific plan to your needs. Always ask about additional charges and fees. For example, Cinfed does not charge origination fees which can save you significant cost.
If you’re considering refinancing your mortgage, a good place to start is your monthly statement, which should show you the current interest rate as well as the balance remaining on your mortgage. With that knowledge, you can contact a trusted loan originator to begin to evaluate your situation.
As a credit union, Cinfed and its mortgage team is uniquely equipped to answer key questions and help members find the best loan solutions for their long term financial success. Learn more about our refinancing options here, or contact the team with any questions.