If you are thinking about refinancing your home, you probably already have a good reason. Maybe you want to switch from an adjustable rate mortgage over to a fixed-rate one, or perhaps you have an opportunity to reduce your interest rate. Either way, there are a number of questions you should ask yourself before you go through with a refinance. You need to make sure that it is truly the right fit for your financial needs. Here is what you should think about.
1. What is your goal in refinancing?
First of all, why are you seeking a refinance? It is important to be crystal clear about your goals. Do you want to reduce the interest you are paying? Are you trying to get away from an ARM? Do you want to stop paying PMI? Are you trying to consolidate your debt or tap into your home equity?
The reason you need to be clear about your goals is that they impact the other questions you need to ask yourself, and how you answer them. You need to understand the potential benefits a refinance could have for you, which could be very different from those they could have for your neighbor or a family member or friend you know who is refinancing.
2. How much equity do you own in your home?
This is something you need to know if your goal is to stop paying private mortgage insurance (PMI). If you own less than 20% equity, any new loan you qualify for is going to carry the same PMI requirement. In that case, if that is your sole reason for the refinance, it will not make any difference (and the refinance itself will cost you).
There may also be situations where you originally put a 20% down payment on your home, and thus have no PMI requirement now. But perhaps you are now underwater on the loan. If that is so, applying for a refinance would mean that you would need to start paying PMI, which would add to your monthly costs, potentially outweighing the benefits of the refinance. So keep that in mind as well.
3. What is your credit score?
Ideally, your credit score should be 720 or above if you want to qualify for a low mortgage rate. If your credit score is below that right now, it may pay off for you to take some extra time to work on raising it. That way when you do apply, you will have a chance to qualify for the best rates.
4. How long will you be in your home?
Finally, this is always a smart question to ask before you dive into a refinance. If you plan to stay in the home for the next twenty or thirty years, refinancing probably makes sense if the math adds up and you know you will save money. In most cases where customers start out with an adjustable rate mortgage in fact, it makes sense to switch to a fixed rate mortgage.
But what if you are only going to be in the home for a couple of years? In that case, it may or may not be worth it. If you will save a little money, but the overall hassle (the new appraisal and so forth) is going to offset those savings significantly, it may be more effort than it is worth.
So now you know some questions to ask yourself when you are trying to decide whether a mortgage refinance might be the right path to take. If you have more questions or need advice on your specific situation, then please give HPI Financial a call at (650) 741-9797. We will be glad to discuss your needs in detail and help you figure out the most suitable option for saving money now and over the years to come.