A house you haven't fully paid for can be a liability, but what if you…
When mortgage interest rates fall, homeowner refinancing activity tends to spike. Those with mortgages on their homes recognize that they might be able to improve their financial situation.
If you’ve seen low rates advertised online, maybe you’ve thought about refinancing your mortgage. But the advertised rates aren’t always what you’ll end up paying, and you’ll have to inquire about fees and closing costs on a new loan. There are some steps to take to ensure it makes financial sense for you to refinance.
If you’re thinking of refinancing, here’s how to get the best deal.
Improve your credit score
The absolute lowest interest rates are usually only available to those with the highest credit scores. If you’re hoping to land an ultra-low rate, you might have to have a score of 750 or higher. Borrowers who are lower risks get the best rates.
You should be able to get your score for free online. If it seems unexpectedly low, you can also request a copy of your report from one of the credit bureaus. Comb through it, and look for mistakes or old items that should be removed. If you can bump your credit profile upward, you might be able to secure a better interest rate.
Paying off or paying down debt, especially unsecured debt, can also improve your score.
Remember, just because you see a low rate advertised doesn’t mean that’s the rate you’ll end up paying. It’s a good idea to get quotes from three or four lenders before filling out any loan application. Be sure those quotes include any fees and closing costs so that you can do a cost comparison for all the lenders you’d consider.
Major banks compete against one another on a large scale, so you might be able to find a special offer from one. Credit unions or local banks might offer friendlier terms, but the application and closing process might take a little longer because smaller lenders don’t always have the personnel resources that big lenders have.
Run the numbers
If you want to know how good a deal you’re getting and how much you’re saving, you’ll have to do a little math. A low rate alone isn’t a real reason to refinance.
A fixed-rate, 30-year mortgage is the most common home loan out there and is almost always going to come with the lowest monthly payment. If that’s your only goal, simply compare your current monthly payment to your new one. Remember that there will be upfront costs to refinancing, so you’ll probably have to stay in the home for a few years with the lower payment to recoup those costs.
A 15-year mortgage might be possible with a rate that’s a half-point lower or more. Depending on how long you’ve been in your home, it might make sense to sign up for a 15-year mortgage rather than extending for another 30 years. You’d likely pay a little more each month than you now – although maybe not if you have a high rate on your current loan – but you’d save tens of thousands of dollars in interest over the course of the loan and pay it off much faster.
It’s important to know your goal – a lower monthly payment, a faster payoff, or less total interest – and then run the numbers to see how well they fit that goal.
The bottom line
When rates are low, it’s tempting to jump at refinancing your home. Sometimes it’s a sound financial move, and sometimes it’s not. It will take a little effort to get the best deal for your situation.