Things To Know Before You Refinance Your Mortgage

Refinancing your mortgage can be a great way to save money on your monthly payments and reduce the amount of interest you pay over the life of your loan. However, there are several things you need to know before you refinance, and making a mistake can cost you dearly. This article will give you some things you should know before you decide to refinance your mortgage.

How Much Equity Do You Have In Your Home?

If you have little to no equity in your home, refinancing is likely not a good idea. Your interest rate on the new mortgage will be higher than you currently have, and your monthly payment will be increased. On the other hand, refinancing to a shorter term or increasing your down payment can be a good idea if you have lots of equity in your home. To find out how much equity you have in your home, check out a site like Zillow.com and use their equity calculator to get a general idea.

What Is The Term Of The Mortgage?

Typically, the interest rate is lower if you increase the term of your loan. However, this change comes with a price. If you extend your mortgage to forty years instead of twenty, for example, your monthly payments will be lower, but your total interest payments will be more at the end. You need to understand how long it’ll take you to pay off the new loan if you choose to extend the term. Ensure that there won’t be any surprises when all is said and done.

What Fees Are Charged?

Besides the interest rate and term, be sure you know what other fees are involved. Some lenders charge a flat-out fee for refinancing, while others apply the exact closing costs you paid to your new mortgage when you bought your home. You need to make sure that you understand how much money it will cost you in the long run and where it will come from before going through with a refinance.

Can You Afford The New Monthly Payments?

When you refinance, your new monthly payments will differ from the old ones. As long as you can make the new payments without going into debt, you’re in good shape. However, if you barely break even each month, you’re probably better off sticking with the old mortgage. Ensure that it’s something you can afford before signing on the dotted line.

What Type Of Refinance Is It?

If you refinance your mortgage to take cash out, you can lose a lot of money if the market crashes and it takes time for you to sell the property. Make sure you understand what type of refinance you are doing before going through with it. If you aim to lower your monthly payments simply, you should be fine. However, if you’re taking out money for some other reason, make sure that it’s the right move before agreeing to the new mortgage.

Are There Prepayment Penalties?

Some lenders charge penalties for early repayment of your loan to discourage people from breaking their contracts when rates go down again. If there’s no prepayment penalty or it’s waived, then you’ll have nothing stopping you from paying off the loan in advance if interest rates drop again. Check with your lender before signing on any dotted lines to avoid getting caught unaware by surprise fees.

Will It Affect Your Retirement?

There are several reasons why changing how much you pay each month could affect your retirement. The more money you have in the bank when you retire, for example, the better off you’ll be because that means less time spent working before getting started with fun activities like traveling and gardening. Being caught short can mean a lower standard of living in years to come.

What Will It Mean For Your Finances?

There are several ways that refinancing might change your financial situation when it comes down to it. If you have a fixed-rate loan, for example, then refinancing to an adjustable-rate mortgage could put you at risk of facing higher rates in the future. Refinancing might also mean that you’re going from one type of monthly payment plan to another, or it can turn a good deal into a bad one by increasing the amount you pay every month and lengthening the term associated with the new plan.

How Much Will It Affect Your Credit?

One of the biggest concerns that people have when thinking about refinancing is how it will affect their credit score. Unfortunately, the process can harm your score, especially if you make changes like shortening the term or increasing your debt. The best way to avoid harming your credit is by asking for a copy of your free credit report before applying and making sure there aren’t any errors in it.

Conclusion

If you are thinking about changing the terms of your loan, it is essential to know what exactly that could mean for you in the long run. There are several things to consider when it comes time to decide whether or not refinancing your home is the right choice for you. Knowing what to expect after refinancing can ensure that you make the best decision in terms of your financial future. For any specific questions about your situation, be sure to ask your mortgage lender to get the most accurate answer!