People often consider refinancing their homes in order to lower their monthly payments and interest rate or switch their loan from an adjustable-rate mortgage to a fixed rate. Both scenarios sound beneficial to every homeowner, and the application process is relatively simple. So, why wouldn’t everyone choose to refinance? Unsurprisingly, this isn’t an option that suits every household, and there are some things to consider before refinancing your home.
Where to Begin When Refinancing Your Home
When you refinance, you’re essentially negotiating a new mortgage for your home, and in doing so, you’re usually looking to lower your interest rate, shorten your mortgage length, or do away with your private mortgage insurance. Some people choose to refinance in order to tap into their home equity to fund an expensive renovation. However, the homeowner is responsible for researching banks, credit unions, and mortgage lenders to find the most savings. Oftentimes, enrolling the help of a mortgage broker is the easiest way of completing this process.
Consider Your Current Financial Standing
Same as when you bought your home, your credit score largely influences the rate of your new mortgage. For some, now may not be an opportune time to make a hard credit check. Also, refinancing comes with an expensive closing cost – roughly 2% to 6% of the loan amount, according to LendingTree. If you don’t have this cash on hand, the lender will factor it into the loan amount, thereby increasing your mortgage and your monthly payment. This is the reason refinancing is not typically recommended for homeowners looking to sell in the next few years.
What Comes After Finding a Better Mortgage Rate?
If you found a better mortgage rate shopping around online, the next step is to reach out to the mortgage lender to gather more information and get the process started. The sooner you do this, the better, as refinancing can take roughly a month to complete. After contacting the lender, your rate will be determined based on your credit score and other financial factors, so you’ll likely be required to provide pay stubs, bank statements, and other personal documents. Once processed, your loan will be held by the new company, and you’ll direct future payments to them.
The Drawbacks of Refinancing Your Home
There are many benefits to refinancing, such as debt consolidation or lowering your monthly payment. However, if you plan to borrow your equity – which is the difference between what you owe and the lender’s determined worth of your home – you could wind up restarting the length of your loan. For instance, your goal may be to pay off student loans using $20,000 of your home equity. Once your application is approved by the lender, based on the new amount of your mortgage, you may have to revert to the original length of the loan, subjecting yourself to a longer period of interest payments.
While there is a lot to consider before refinancing your home, it’s important you carefully weigh all the pros and cons to make the best financial decision. While you’re assessing the viability of refinancing, you should also take this time to review your homeowners insurance to determine whether you’re receiving the best price and coverage. At TJ Woods Insurance, we can find you’re the best homeowners insurance for your circumstances. If you would like to learn how to increase your insurance savings, contact us today.
