Are you contemplating refinancing your mortgage, but aren’t sure if it’s the right move? Some common reasons people do a refinance include:
- ⬥ To lower interest rates by at least .5% (for larger loans)
- ⬥ To switch to a fixed interest rate
- ⬥ To shorten the life of their loan
- ⬥ To tap into some of the equity you’ve built up in the home
- ⬥ To get better terms based on an improved financial situation (i.e. better credit, debt picture, etc)
- ⬥ Because they’re nearing retirement
- ⬥ To consolidate or change the terms of a second mortgage
- ⬥ Because they’re getting a divorce
Truthfully, it’s hard to be one hundred percent sure that you’re taking the right step, but there are things to consider that might help you decide.:
Do the math
Having identified your motivation for refinancing, it’s time to figure out what loan will help you reach that goal.
In short, if you want to lower your monthly payment, pay off your loan faster, or save on interest over the life of the loan, a rate-and-term refinance may be the best option for you.
Alternatively, a cash-out refinance may be a better option if you wish to take cash out or consolidate your debt.
Do this before applying with a lender
Clean up your finances
In part, your financial situation can influence whether you get the best refinance loan. For example, the better your credit score, the better the refinancing rates you’ll be able to get, which can result in substantial savings.
Prep your home for the appraisal
To determine your home’s market value, your refinance lender will also request a home appraisal. An appraisal of your home is important since it determines how much equity you have in your home relative to its value.
Generally, the higher your home equity is, the better the rate lenders will offer you. A cash-out refinance requires you to have equity in the property. Your equity can play a crucial role in determining whether you are eligible and how much you can withdraw.
The minimum you should do to prepare includes:
- ⬥ Making sure your home includes safety features such as a fire detector and/or carbon monoxide detectors, fire extinguisher(s), working window locks, etc.
- ⬥ Cleaning and decluttering every area of your home, removing any impediments to entry and inspection by the appraiser
- ⬥ Ensuring that all household systems are in good repair (e.g. no leaky faucets, holes in the drywall, etc.)
- ⬥ Itemizing any home improvements you’ve done and share with the appraiser
Your financial information:
Gather your paperwork
A refinance usually involves the same paperwork as a new mortgage. Ensure the loan process runs smoothly by gathering all necessary financial documents before your lender asks for them. Your lender will usually ask for:
- ⬥ 2 years of personal tax returns
- ⬥ 2 years of business tax returns
- ⬥ 2 years of W-2s or 1099s
- ⬥ 2 months of bank statements
- ⬥ Proof of alimony and/or child support payments
Before refinancing your home, consider that refinancing takes years to recoup the 3% to 6% of principal you pay, so don’t do it unless you plan on staying in your current home for a few more years.
If you refinance your mortgage, keep in mind that many people who previously took on high-interest debt for credit cards, cars and other purchases will simply do it again.
In this scenario, the refinance would only make things worse; wasted fees on the refinance, lost equity, several additional years of increased interest payments on the new mortgage, and a return of high-interest debt as the credit cards are maxed out again. The result might be an endless, never-ending debt cycle that leads to bankruptcy.
Finally, don’t be a statistic. Think long and hard about why you want to refinance and what would happen in the event you did go through the process. Get help and advice from disinterested people to get their perspectives on the situation.