Should I Refinance My Home? Three Questions to Ask Before You Do

Finances

If you’re a homeowner, it’s not uncommon to experience a mild case of financial FOMO, the “fear of missing out.” Mortgage rates are dropping, so you might be wondering whether now is a good time to refinance your home.

Before you make a decision to refinance your home, there are three important questions you should ask.

1. What Are My Financial Goals?

Most homeowners consider refinancing for two main reasons. Some simply want to lower their monthly bills. A lower interest rate can lower their monthly mortgage payment as long as they maintain the same mortgage period.

Other people use the lowered interest rate to shorten their mortgage term, hoping to pay their mortgage off sooner. Switching from a 30-year mortgage to a 15-year mortgage is a big step. While you’ll pay off your mortgage sooner, it will demand a higher monthly payment. Be careful that you don’t overextend yourself by trying to pay off your mortgage sooner than you’re financially equipped to do.

2. Can I Qualify for a Lower Interest Rate?

Remember that your mortgage interest rates depend on your credit score, as well as your debt-to-income (DTI) ratio. Your DTI tells your lender how much of your income goes toward regular expenses such as student loans, car payments, etc. Both your credit score and DTI can fluctuate over time. If it hasn’t remained steady or improved since your initial mortgage was issued, you may not necessarily qualify for a refinance.

Some lenders want to know that you’ve accumulated some home equity before you refinance. Depending on your lender, you may not qualify to refinance until you’ve paid off at least some of the mortgage principal.

3. Is It Worth the Cost?

Don’t forget that even a refinance will come with closing costs. These costs are typically 2% to 4% of the total loan value. Before you commit to a refinance, you’ll want to ensure that the money you’re saving exceeds the money you’re spending to refinance.

For example, if your closing costs are $2,000 and you’re saving $200 on your monthly mortgage payment, it will take 10 months to break even. Significant savings won’t start to be noticeable until roughly a year after you refinance.

This also means that refinancing might require you to dip into your savings a bit to cover the closing costs. Make sure that this is something you can afford to do, since the savings from the refinance can’t be used to rebuild your savings until after the break-even point.

Consider Your Options Carefully

While there are some financial pitfalls to avoid in home refinancing, some homeowners can take advantage of lower interest rates in order to secure a better loan. 

If your financial standing has improved since your current mortgage was issued and you’re able to navigate the transitional costs of refinancing, talk to a lender about your refinancing options. It just might be the right time to do it!

This article is for information, illustrative and entertainment purposes only and does not purport to show actual results. It is not, and should not be regarded as investment advice or as a recommendation regarding any particular investment action. Courtsey of Deanne Katsaros Greentree Mtg. Co. LP.