What to Consider Before Refinancing Your Mortgage

Mortgage rates are dropping. If you already own a home, this may be a good opportunity to refinance your current mortgage in order to decrease your monthly payments and lock in a lower rate. However, refinancing isn’t for everyone, and in some cases, it’s better to stay with your current mortgage. There are several things to consider before deciding whether refinancing your home loan is right for you.

Not everyone gets the low interest rates on a home loan

Advertised rates are often reserved for those who have the best credit scores. Before refinancing, check your credit score to see if it's high enough to qualify for those premium offers. In addition, advertised low rates are often only available for loans that are below the jumbo level, so make sure you know those limits.

There are other factors that may reduce your ability to get the lowest rate. For example, taking out a home loan for more than 80% of your home’s current value can increase your interest rate. This is especially worth noting if your home value has declined below the sale price. If your home is in an area with significantly decreased values, it may be useful to get an appraisal before proceeding with a refinance.

Refinancing a home loan can be costly

If you do get approved for a low interest mortgage, keep in mind that refinancing can be expensive, and closing costs can be high. While “no closing cost” loans may exist, they usually result in a slightly higher interest rate, and some fees may still be charged. It’s essential that you evaluate fees before agreeing to refinance.

Either way, always be sure to shop around. Start with your local bank or credit union, but be sure to see if any online lenders can offer you as competitive rate.

Refinancing may extend your repayment window

Another important consideration: if you're refinancing with a 30-year term, you're likely going to be pushing back the date that your mortgage is fully paid. If you’ve been in your home for a while, it may be beneficial for you to consider refinancing your 30-year mortgage to a 15-year mortgage. While your monthly payment may be higher, the amount you save in overall interest payments can be substantial.

Prepare for your refinance

For those who do refinance, use your monthly savings wisely. Because you're accustomed to paying more on a monthly basis, you should see a decrease in your monthly expenses. Consider using this extra money to pay down debt or build a retirement fund.

Finally, don’t get caught at tax time. For many people, home mortgage interest is their largest deduction and lower interest equals a smaller deduction. Planning upfront can ensure that you don’t receive any surprises at tax time. Consult with a qualified accountant or attorney for specific advice.

Considering a refinance to free up money in your budget? Start with a free financial counseling session first and let our experts give you the best advice on how to repay debt and balance your budget. Counseling is available 24/7, online and over the phone.