Steps to Take When Refinancing Your Home
by David Sung
Homeowners who are looking to save extra money now or in the long run may look to refinance their homes when interest rates decrease periodically. For first-time homeowners, it may be hard to know what steps to take to make sure that they get a great rate and come out on top of their payments. Before taking that final step of accepting a new interest rate, make sure you take all the necessary precautions.
Know where you stand currently
Homeowners should gather all their current information such as their current credit scores, current monthly mortgage payments, and their current interest rates.
Set up goals for why you want to refinance
Most homeowners who refinance their homes are doing so for one of two reasons:
- They want to refinance for a lower interest rate meaning they will make lower payments for a period of time. This is also called “plain-vanilla refinancing.”
- Homeowners may choose a “cash-out” refinance, where they will use home equity to pay down other debt, or pay for home improvement costs. This type of refinancing often comes with a higher interest rate.
Make sure that the type of refinancing you choose meets your goals
If you choose to save money as a goal, make sure that the new chosen interest rate and mortgage payments allow you to save a substantial amount of money. Then, calculate the amount of money saved over time and if that amount will make a substantial impact on decreasing other forms of debt you currently hold.
If your goal is “plain vanilla refinancing” and you wish to lower the payments in hopes of saving more money for retirement, then it actually may be worth considering paying slightly more over a shorter term, say instead of a 30-year mortgage, you choose a 15-year mortgage instead. If you take a 30-year loan and refinance it for 15 years, the payment will be higher but you pay less interest over the life of the loan. Thirty-year loans are cheaper monthly, but you pay more in interest in the long term.
Apply for several different quotes at once
Don’t rely on one single lender to give you the best quote. Instead, choose between 3 to 5 different lenders and request quotes and then compare interest rates and monthly payments. Also, read all the fine print before accepting the new terms. Some lenders may require mortgage insurance while others may not.
Negotiate for the best quote
Lenders usually allow you to negotiate within a certain set of parameters for the best quote. This may require explaining your specific situation and goals to help the lender make their decision to negotiate on the quote.
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