There’s a reason so many homeowners are eager to refinance their mortgage. Refinancing rates have remained close to their lowest levels in months. As such, many borrowers are expected to reduce their mortgage costs by swapping their existing home loans for new ones. But before you rush out to refinance, you’ll want to make sure it’s the right decision for you. And if the following scenarios apply, it may not.
6 simple tips to get a 1.75% mortgage rate
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1. Your credit score has just plunged
Usually, the whole point of refinancing is to save money by lowering the interest rate you pay on your mortgage. This, in turn, could result in a much lower monthly payment. But you are only likely to get a competitive interest rate on a refinance if your credit score is in good shape. And if yours has taken a dip recently – say, because you were late with a number of bills or ran too high a balance on a credit card – now isn’t the best time to refinance. Instead, you should work on increasing your score and then apply for a new home loan.
2. You have just taken out another loan
To qualify for mortgage refinance, you will need to show lenders that you are not in debt. If your debt-to-debt ratio is too high, it’s a red flag that you may be falling behind on your mortgage payments. As such, if you’ve recently taken on another large loan, such as a car loan, you may want to put that refinance request on hold. Alternatively, you can pay off existing debt – for example, a large credit card balance – and so ask for refinancing so that your debt-to-income ratio isn’t that bad.
3. You are planning to move
There’s a downside to mortgage refinancing – you’ll have to pay closing costs to get a new home loan. These costs can vary depending on the lender, but they are usually 2% to 5% of your loan amount, which is not a small amount. Plus, your closing costs will weigh on your mortgage savings, so you won’t really be a winner from refinancing once you break even on those fees. If you don’t plan to stay home very long, you may never break even.
Let’s say you are looking to refinance a mortgage for $ 200,000 with closing costs of $ 6,000. Let’s also assume that you can reduce the interest rate on your loan enough to reduce your payments by $ 300 per month. That’s a lot of savings, but it will take another 20 months to break even. If you plan to move in the next two years, refinancing is not worth the trouble.
Refinancing can mean a world of savings, especially if you are able to significantly reduce the interest rate on your loan. But before you apply, make sure that the time is right and that getting a new home loan is, in fact, the smart move for you. You may find that it is better to wait or keep your existing loan after all.