When interest rates are low, many people start thinking about refinancing their homes. But is it the right time? For some, it might be, but for others, maybe not. Here’s why: The rule of thumb for refinancing is that there should be a difference of at least 1% between your current mortgage rate and the new rate you can get. So if you’re paying your mortgage at a 5.2% interest rate and the current national average interest rate for a 30-year mortgage is 4.2% or lower, you might want to look into refinancing.
If you lock in a lower interest rate, refinancing can lead to a lower monthly mortgage, saving you money in the long run. While there are several reasons people choose to refinance, the ultimate goal is to save money by way of a lower interest rate, lower monthly payment, and dropped FHA insurance.
Here are some tips to refinancing your home loan:
Start with the basics.
You should have an idea of what your current credit score looks like. To refinance, you’ll want good or excellent credit. Ideally, your credit score should be the same or better than it was when you first took on a mortgage. Also, take a look at your current lender terms and have answers to these questions:
- What are you paying per month on your mortgage?
- What’s your current interest rate?
- How much do you still owe on your loan?
- How many years do you have left on your loan?
Crunch some numbers.
Take advantage of the several free mortgage refinancing calculators found online. Do your research to get an idea of what the current national average interest rate looks like and what your new loan amount could potentially be. Don’t forget to take into account all the necessary fees that go into getting a new mortgage.
Shop the best refinancing rates.
Search the Web and make some phone calls. Don’t be fooled by rates that seem too good to be true. Do some investigative work on the lenders and make sure they’re reputable.
Know what you want.
Have a plan in place, and understand what you ultimately want to achieve from refinancing. You also need to understand what getting advertised—the fine print included. Typically, when you search for refinancing rates, you’ll see interest rates on a 30-year loan, which you probably won’t want to get into if you’ve already been paying into a 30-year loan. You’ll end up spending so much more in interest over the term of the new mortgage. Instead, ask the lender to match your remaining loan term. So, if you have 27 years remaining on your loan, you can tell the lender to calculate the payments so the refinanced loan gets paid over 27 years instead of 30.
Apply with a few lenders.
Consider applying for a mortgage with three to five lenders. They will need some basic information about your finances, including current mortgage payments and HOA obligations. If you’re in an Associa-managed property, documentation for lenders can be found here. Lenders then can provide loan estimates that detail the loan terms, projected payments, estimated closing costs, and other fees. Compare the loans from each lender, and find one that works for you. Be advised that anytime you apply for a mortgage, it affects your credit score, so choose the lenders wisely. Submit all applications within a two-week period for less impact on your credit score.
Do your research, come prepared, and keep these steps in mind to refinance the smart way.