Before You Refinance Your Home Loan

When interest rates dip, millions of Americans consider refinancing their home loans to decrease their 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 is high enough. 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 percent of your home’s current value can increase your interest rate. This is especially a factor as some home values have recently declined below the price paid by their owners. 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.

Refinancing a home loan is not right for everyone.

If you have a prepayment penalty on your existing loan or have not been in your home long enough for the savings to outweigh the costs, refinancing may not be in your best interest. Also, keep in mind that if you are refinancing with a 30-year term, you are 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, interest rates are even more attractive for shorter loans and the amount you save in overall interest payments can be substantial.

For those who do refinance, use your monthly savings wisely. Because you are 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.

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