Refinancing always saves money… Right? WRONG
Only refinancing intelligently will save money. If you only refinance when rates are low then you’re not really playing the game. That’s bad.
These refinancing tips should move you in the right direction.
1. What Is Refinancing?
If you’re wondering “how does refinancing work?” the answer is quite simple. If you’re going to refinance your home loan, you will be asking your bank for a loan that equals the total you currently owe.
If you refinance your mortgage correctly, you should be paying off your new loan at a much lower interest rate and at a faster pace than you were before.
Additionally, you can often merge several home-related debts into one larger debt, reducing the cost of your monthly payments.
Refinancing often results in lower monthly mortgage payments as well.
Sounds like a no-brainer, right? Well, sort of.
In many situations, it’s actually better to let the market, or your personal circumstances, change before applying for a new loan.
2. When Should You Be Refinancing?
Before you make the jump, you should be asking yourself. Do I love this home? Do I want to be in this part of Michigan 10 years down the road? What is my current rate of interest? Is my credit score about to roll into a better or worse bracket? Do I have many different streams of home-related debt?
If your answer to any of these questions was yes, or if your current rate is high, then refinancing could be worth it.
Generally, we recommend refinancing if:
- You can improve your rate with a drop in current rates,
- Your credit score has gone up a bracket.
- Your home equity has increased substantially.
- You know that you will be staying in one area for multiple years.
- Your home equity has increased dramatically.
If your answer was “no” or if you don’t know and you’re questioning refinancing, then it might be better to reach out to us so that we can help you weigh your options.
The final call is always yours. Do your research. If you’ve decided that you want to move sooner rather than later or if you already have a good rate and your credit won’t qualify you for a lower one anytime soon reach out to the experts. They might be able to find some deals.
If your credit has improved or your house has built a decent amount of equity and your life allows for refinancing then it’s time to move forward!
3. How to Build a Good Financial Plan
You should never enter into a new loan if you’re unsure of your current financial situation. After deciding that you want to refinance you should do the following.
Assess Your Financial Situation
Ask yourself several questions.
Will your financial situation get better or worse in the coming years? Would you like to pay off your loan sooner rather than later and can your savings handle the transition?
How likely are you to be approved for a new loan?
Check Your Credit Score
If your score is higher now than it was when you originally bought your home then you are in luck! It’s very possible that you will qualify for a new loan with a lower interest rate.
If your score is lower than when you first applied, all hope is not lost. You will most likely not qualify for a lower rate, but you should begin looking for ways that you can improve your score.
Check Your Home Equity
Home equity is simple. Get your house appraised. Compare the appraised amount to the original price. Your home equity is equal to the difference between the two prices!
If your home has increased in value by more than 25% then you will see a maximum amount of returns from refinancing. If your home value hasn’t increased tremendously, you can still receive a discount! The discount just won’t be as large.
Gather Your Important Financial Documents
Recent pay stubs, bank statements, and federal tax returns will be required by most banks so you should always have them handy.
Be sure to reach out to your lender to ask about their specific requirements.
Gather Your Records!
Pull a record of your old loan so that your refinancing specialist can reference your old loan!
you should also keep a copy of your new loan for future reference. You never know when you will want to refinance again!
4. Is Refinancing Worth It?
Despite the pessimistic start to this blog, refinancing is generally worth it! However, there are a few things that you should watch out for.
Refinancing always has a break-even point that needs to be calculated. Your new loan might cover some of these costs but you’ll need money on hand to pay for appraisals, insurance for your title, taxes, origination fees, and more.
You won’t save money until you pay off these initial fees. Just like upgrading to solar, you won’t see the full benefit until your upgrade has paid for itself.
Even though your interest will go down, depending on the plan you choose, your total financing debt MIGHT INCREASE. It’s always smart to consult with a mortgage specialist before you commit.
Some lenders charge you a fee to pay off your debt early. Reach out to your current lender to see if this is the case for them as well.
5. How Do You Find Your Next Loan?
Many people refinance through the provider that they originally opened a mortgage with. That’s completely understandable. Your information will already be in their system and more importantly, you probably trust them.
However, a sense of security and ease shouldn’t be your driving motivation.
Shop around. Look at the rates and contracts that other mortgage providers are offering. Then choose the option that makes the best sense for your wallet and for your long term goals.
So, What Does All Of This Mean?
Refinancing is trickier than it seems. Before making a move, you should double-check your finances and evaluate your plan for the future. No matter what you decide, you should always, reach out to a professional to advise you on the right course of action.
If you would like to ask us for a quote or advice about refinancing, we’d be happy to help out. Just send us an inquiry and we’ll get going from there!