The following is a guest post by Bills.com.
Re-financing a home can be a great way to save money. If you can secure a lower interest rate than you're paying today, that can be money in your pocket. If you own a home and have considered a re-finance, here are five things to think about that can help you decide whether it's worth the time to pursue in greater detail.
- How's your credit? Advertised rates for re-financing loans are really low, but those rates will only apply to you if you have a great credit score. Make sure you check your credit reports. If you've had a history of late payments or if you have high credit card (or other type of loan) balances, you might have some work to do before thinking about a re-finance.
- What's your equity situation? If you're a homeowner, chances are your house is worth less than it was a few years ago. Depending on when you bought, how much money you put down, how much you've paid since, and what the housing market has done, you might be limited in your re-finance options. In order to qualify for the lowest rates without paying ‘mortgage insurance', you will likely need 20% equity in your home. If you're below that, be prepared for the possibilities of a higher rate or of being required to pay mortgage insurance. If you have a good chunk of cash, you could always bring a large down payment to your re-finance as well.
- What are the up front costs? Re-financing will often involve closing costs of some sort. Traditionally, your savings over time will offset these costs, but it can take a couple of years before that break-even point hits. Make sure to understand your costs, so that you can not only prepare for what you might need to pay but also to make sure that you plan on staying in your home long enough to make the re-finance work in your favor.
- What are the monthly costs? If you re-finance into the same loan term that you have now, your monthly payments should go down. But, often times, during a re-finance is a great time to move to a shorter term loan. This usually get you an even lower rate, but your monthly payments could be higher than you're paying today, with the benefits that you'll pay much less interest over the term of the loan and be finished paying the loan a lot sooner?
- Where do I start? There are a large number of options to look once you decide to explore your options. One option is to start with your current lender. There are other options to look at, including a no-cost refinance or a variety of other options.
A re-finance can be a valuable opportunity to build equity in your home, but taking the time to answer the five questions above can let you know whether the time is right to invest the time into researching and making the best decision possible.
Have you re-financed or considered a re-finance lately? What have been your experiences?