5 Questions to Ask Before You Refinance a House

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With interest rates under 4%, and predicted to stay low for the next couple of years, now is one of the best times to apply for a mortgage loan.

A low rate increases purchasing power if you’re looking to buy, and if you’re thinking about a refinance, a low rate can drop your current mortgage payment.

This isn’t a decision to take lightly. Here are five questions to ask yourself before refinancing your house.

1. How’s my credit score?

The fact that you own a house and currently pay a mortgage doesn’t guarantee an approval. A refinance is a brand new loan, and like your original loan, your mortgage lender will review your credit and income. Any changes in your credit history or finances can affect the loan application. This is news to many homeowners. Some people attempt refinancing after losing a job to lower their mortgage, but this doesn’t always work.

2. Why do I want to refinance?

What do you hope to accomplish by refinancing? Having a clear goal in mind can help you take the best approach. A refinance can achieve multiple financial goals. Some people refinance to get a better interest rate and lower their monthly payment. Meanwhile, other property owners refinance to tap into their home’s equity and acquire cash for home improvements, debt consolidation, and other things.  

3. Do I plan on moving in the near future?

The decision to refinance doesn’t mean that you’re stuck in your house forever. But if your intentions are to move within the next two to three years, a refinance doesn’t make financial sense. Here’s why. Like your original loan, there are costs associated with refinancing a house. Closing costs vary by state but can run as high as 5% of the mortgage loan. There are different ways to deal with closing costs. You can pay these costs out-of-pocket, but depending on the lender, there’s the option of wrapping these costs into the mortgage.  

4. Do I have enough equity?

Equity is a factor that many don’t consider when refinancing. The thought of lowering your home loan payment and saving money each month is thrilling. That’s until you learn that a particular lender will not refinance your mortgage because you have less than 20% equity. But there is good news for homeowners with no equity or little equity. Programs offered by Fannie Mae and Freddie Mac can assist in these situations, and if refinancing to an FHA mortgage, you only need 5% equity.

5. What are my options?

There is no “one-size fits all” refinance. Different options are available but don’t rely on your mortgage lender to pick the best mortgage. Options can include a conventional mortgage, an FHA mortgage, a fixed rate and an adjustable rate mortgage. Likewise, you can go with a traditional 30-year term, or shorten your mortgage length with a 15-year or 20-year mortgage.

Consider your long-term financial goals when choosing a mortgage.

Do your research and ask plenty of questions? Your mortgage lender can provide sample monthly payments with different options, make suggestions and provide worst-case scenarios. Ultimately, it’s your decision and you need to select the option that’s the most affordable.

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