Things To Look At Before Refinancing

There are many facets to consider before you can make an informed decision on whether or not this will be beneficial for you in the long run.

Paulette Dague

PUBLISHED ON
Thursday, March 29 2018

Knowing whether or not to refinance your mortgage can be challenging and confusing. In some cases, refinancing does prove to be the best option for saving money throughout the life of your loan. However, there are many facets to consider before you can make an informed decision on whether or not this will be beneficial for you in the long run.

Start by checking your credit score. If your credit score has improved since you bought your home, you may want to explore refinancing to see if you qualify for a lower interest rate. This could save you money over the life of your loan. Another consideration is debt to income ratio. Even if you have outstanding credit, your debt to income ratio can affect the approval from the lender. If that number is over 36%, it is not likely that the lender will approve the refinance.

After you’ve determined your credit standing, it is important to grasp the original terms of your loan. In some cases, you may incur a penalty for paying the loan off early. If you do have a pre-payment penalty, it is important to understand the penalty terms and conditions. The time period in which a penalty would occur varies from loan to loan. It could be as little as six months, but could also be as much as ten years. In addition, it is important to know the amount of your penalty. Given these two factors, it may end up being costlier to refinance before the penalty period expires.

Next, examine your loan interest rate and how it compares to current interest rates. Refinancing would obviously not be beneficial if interest rates are higher than when you originally obtained your loan. This would neither lower your monthly payments nor save you money by negotiating a shorter loan term.

If the interest rate is lower than your current interest rate, it is imperative to explore different loan term options. For example, the most common loan term is a 30-year fixed mortgage. If you are able to make higher monthly payments, you may be able to refinance into a shorter loan term such as a 15-year fixed mortgage. The advantages to shorter loan terms are lower interest rates, owning your home sooner, and saving thousands of dollars.

If you are eligible to refinance by meeting certain criteria, as well as making sound financial sense, you should seize the opportunity. Financial forecasting has predicted that interest rates are likely to rise by the end of 2018. If you are able to act before that occurs, it’s possible to save hundreds or thousands of dollars on your loan!

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