Ask these 5 questions before refinancing your mortgage
Don’t be afraid to ask the hard questions before spending time and money on a mortgage refinance. (iStock)
Are you considering a home refinance? As interest rates fall, it’s tempting to go all in and start applying with a lender. However, refinancing your property is a big financial decision with long-lasting consequences.
While refinancing your home could allow you to reduce your monthly payment or access equity funds to pay off other debts, there are some things you should consider before moving forward.
5 common questions people ask when refinancing
Thanks to lower interest rates, many people are considering a refinance. Here are the answers to some of the most common mortgage refinancing questions:
1. What happens when you refinance a mortgage?
Refinancing a mortgage is the equivalent of taking out a brand-new loan on your home. The new loan typically offers lower interest rates, longer repayment terms, and/or a lower monthly payment. When a lender approves your refinance, the new loan replaces your original mortgage agreement.
To see what kind of rates you qualify for, plug some of your information into Credible's free online tools.
EVERYTHING YOU NEED TO KNOW ABOUT MORTGAGE REFINANCE
2. What are refinance mortgage rates today?
At the time of publication, the average 30-year fixed-rate loan had an interest rate of 2.98 percent, and the average 15-year fixed-rate mortgage had an interest rate of 2.48 percent, according to Freddie Mac. These historically low-interest rates follow emergency rate cuts by the Federal Reserve in response to the coronavirus pandemic. It’s unclear how long prices will remain this low, so if you are considering a home-refinance, taking steps now could help you lock in lower rates.
Use an online tool like Credible to compare rates and lenders. Reviewing terms from multiple lenders will help you get the best deal possible.
IS IT WORTH IT TO REFINANCE FOR 1 PERCENT?
3. Is now the right time to refinance my mortgage?
Interest rates are at a historical low, which means that for many people, this may be the best time to refinance a mortgage. However, every borrower’s situation is unique. If refinancing your mortgage is a serious consideration, take some time to answer a few questions about your motivation and your financial situation to see if you still feel good about moving forward.
Things to consider:
How is my credit?
Do I have enough equity in my home?
What are my financial goals for the future?
How long will I stay in the home after I refinance the property?
Why am I considering a refinance?
What are my current loan terms, and can I qualify for better conditions?
Have I already taken out a line of credit or a second mortgage?
Can I afford the closing costs associated with a home refinance?
One of the key considerations is whether refinancing your mortgage will save you money. Before applying, use a mortgage calculator to determine whether a refinance could save you money.
REFINANCING YOUR MORTGAGE WILL SAVE YOU THE MOST MONEY IN THESE CITIES RIGHT NOW
4. How does refinancing a mortgage work?
When you apply to refinance your mortgage, your lender will review your current loan. Ideally, you’ll have at least 20 percent equity in the property.
Like getting your original loan, you’ll want to shop around to find the best lender for your situation. Use a tool like Credible to review multiple lenders who give you rate and cost estimates. Once you’ve found a lender that fits your needs, you’ll need to complete the application process.
The lender will look at your credit report and equity you have in your property. During this process, make sure to review all documents and keep an eye out for closing costs and other additional fees. Ask your lender about closing costs and other fees upfront to save time and money.
The result is a new loan with new terms. Don’t forget to review your terms before signing the loan documents. Keep an eye out for any errors or items that raise questions.
HOW TO REFINANCE YOUR MORTGAGE
5. When is it the wrong time to refinance my mortgage?
You should avoid refinancing your mortgage unless you plan to stay in the property for several more years and if your savings are less than the cost of your mortgage refinance. If your current home loan is in forbearance, talk to your lender to see if you qualify for a refinance.
Expect to pay between $1,500 and $4,500 in closing costs and fees for your mortgage refinance. You can pay the fees upfront or roll the price into the new loan balance.
While low-interest rates make refinancing your home loan an enticing option, make sure to run all the numbers, and use helpful resources like Credible to get in touch with experienced loan officers who can offer advice for your financial situation.