For many homeowners, the last few years have offered a lot of tempting opportunities to refinance our mortgages. I refinanced myself a few years back in order to get a lower interest rate. But is refinancing always a good thing to do? The people in the real estate and mortgage lending businesses would have you believe it is, but the fact remains that it’s not. There are many different considerations before you decide to go down this road, so to avoid developing an acute coronary syndrome, walk carefully.
First of all, why are you thinking of refinancing? Perhaps you want to take advantage of a lower interest rate; maybe you are suffering in the economy and want a lower payment; perhaps you might be thinking of refinancing in conjunction with a home equity loan in order to have extra cash for something else. All of these possibilities have their own ramifications and need to be thought through. While businesses often employ project accounting software to keep on top of their financial affairs, you can still keep on top of yours. Whatever the reason, the wisdom of refinancing is heavily dependent on four things: the amount of equity already established in your home, the interest rate you’ll pay, the length of the loan, and your credit history.
Beginning with equity, finding a lender to offer you a decent deal requires that you have some equity built up. If you financed upwards of 80% or more of the purchase price of your home, and you’ve only lived there a few years, you haven’t payed enough into the principle to build up any real equity. Lenders are reluctant to refinance in this case because they’ll end up still floating almost the entire value of the property. It’s best to make sure you have a good amount of equity built up to get the best deal possible.
The interest you’ll pay on your new loan is often an incentive for many homeowners, especially if current rates are a point or more lower than what you’re paying. On a typical thirty-year $100,000 mortgage, you can save nearly $28,000 in interest with a rate reduction of just 1%. But if you’ve already paid 20 years into the scheduled 30, you’ve already paid most of your interest. Refinancing will string that mortgage out to 15 or 20 years and cost you more in interest. Likewise, a .25% reduction in the 5th year of a 30 year loan isn’t likely to save you anything after you add closing costs in. The loan length goes hand in hand with interest rate, so consider these things together.
Finally, your credit history plays a big role in a financing decision. The higher your credit rating, the more willing lenders are to do business with you, and the better deal they will offer. To keep your credit rating high there are a few things you can do. Make sure you pay your bills on time, avoid running up large balances on your credit cards, and avoid applying for too many credit opportunities. With a decent credit rating you should be able to negotiate a good deal with a good lender.
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