Is It a Good Idea to Refinance a House?
- Examining your personal credit score provides indication as to whether now is the best time to refinance your home loan. A good credit rating not only helps you get approved by a lender, but affects the interest rate on the mortgage loan. If you are refinancing to bring down your present rate and lower your house payment, only apply for a loan if you have a good credit score. For the best mortgage rate, wait until your score hits 740, recommends Bankrate.com.
- Your mortgage lender will arrange for a home appraiser to visit your home and assess the property's worth. Refinancing your house will require that you have at least 20 percent equity in the home for a conventional loan. Having this amount of equity is beneficial because it helps lower the mortgage rate, and you'll avoid paying private mortgage insurance, which is required if there's less than 20 percent equity. A broker can help you find a loan that requires less than the 20 percent minimum if you don't have adequate equity. This will likely require applying for an FHA mortgage loan, which requires only 5 percent equity.
- Know your reason for refinancing your mortgage loan before speaking with brokers or lender. Clear reasons to apply for new financing can include cashing out your equity and using the cash to consolidate debt or make home improvements or taking advantage of falling interest rates with the hopes of reducing home loan payments. If you have a mortgage with an adjustable rate, refinancing presents the opportunity to acquire a fixed rate and payments that do not increase or decrease with fluctuations in prevailing interest rates.
- Knowing your plans for the future is also key to deciding if now is the best time to refinance a mortgage loan. Refinancing is useless if you plan on moving within one or two years, because refinancing a mortgage can costs several thousands of dollars in closing fees. Review your estimated monthly savings with a mortgage refinance and then divide this figure by the closing costs on the mortgage loan to determine how long you must remain in the home for the savings to outweigh the costs. For example, a decrease in interest rate can shave $300 off your mortgage payment. But if you spent $10,000 in closing costs, plan to live in the property for at least 30 months to recoup the costs.
