Five Rules for a Rewarding Refinance
With mortgage rates at historic lows, the Federal Reserve recently cutting the funds rate for the first time in a decade, and more rate cuts expected as soon as this month, many homeowners can now benefit from refinancing.
But how do you know if refinancing your mortgage is the right move? We’ve put together five rules to help guide your way to savings.
Check Your Credit
Your first step on the path to refinancing—or getting an initial mortgage for that matter—should be to know your credit history. Any lender you work with will be taking a very close look at your financial history, so it’s best to know what’s there beforehand.
To make the most of any decision to refinance, you’ll want to have your credit score at its peak. Spotting any issues before you speak with a lender will give you some time to correct problems, or pay down balances that will end up limiting your ability to save.
Check Your Rate
You will also need to know your current mortgage rate. The difference between the interest rate you’re paying now and refinanced rate you are eligible for will play a huge role in determining your savings. If your existing mortgage originated 10 or more years ago, and your creditworthiness hasn’t dropped, then refinancing would almost certainly save you money.
Plan to Stay
While a lower interest rate will reduce your monthly payments, refinancing also comes with origination and closing costs. Recouping those costs will take time, even with a lower mortgage payment. Before you refinance, you’ll want to have a good idea of how much longer you plan to stay in the home and make sure the decision will pay off.
Impact of Equity
Lowering your interest rate isn’t the only way to cut costs by refinancing. If you currently have an FHA loan, you are paying Private Mortgage Insurance (PMI) to protect your lender in the event you default. However, if you have at least 20 percent equity in the property, refinancing to a conventional loan could allow you to end your PMI premiums and save you even more.
More than Monthly Payments
Refinancing is ultimately about saving money. But, lowering monthly payments isn’t the only route to consider. A combination of an interest rate reduction, improvements to your credit score, and increases in income since your original mortgage can make refinancing to a shorter term the right option. Transitioning from a 30-year mortgage to a 15-year one can allow you to build equity dramatically faster and save on interest payments without significantly changing the housing costs you are accustomed to.
If you think you’re ready to refinance, contact Open Mortgage to speak with an experienced loan originator today.