Refinancing mortgage is usually something you opt for when you want to go in for a new loan without completely paying off your old one. This is usually done by combining your old and new loans together or completely restructuring them. Questions such as your financial situation and your eligibility for the mortgage should be asked when you are considering refinancing.
Refinancing your mortgage will reshape your own finances so you need to put though into it. Refinancing mortgage means you are constantly making use of your property value and lower interest rates. However, it’s not that simple. You still have to pay closing costs, legal fees, appraisal costs, lender fees and some more based on the lender and the contract you are in.
Here are a few factors you should take into consideration when thinking of this decision.
Interest Rate
Interest rate will be the biggest driver, pushing you to refinance your mortgage. Any mortgage deal that is offering low interest rates is worth looking into. However, you’ve got to put that interest rate against the closing costs that will be charged and ask yourself, ‘Is it worth it?’ or ‘Can I manage to bear the closing costs?’. If it is going to be used to pay other high interest debts, it should be evaluated positively.
Closing Costs
Obviously, the next thing you should be worrying about is the closing costs. Every mortgage, even the refinancing ones, have extra fees you have to pay which are called closing costs. They usually include things like lawyer fees and home evaluations as well as the pre-payment penatly.
You can get a quote for a closing cost from the lender, but it’s only when the deal goes through that you can get the exact figure. Take your financial situation into account and see if you can manage the costs.
Most ‘no closing costs’ mortgage deals are even more dangerous because they carry hidden costs such as a higher interest rate.
Mortgage Prepayment Penalty
Some lender agencies offer a mortgage prepayment penalty. These mortgage loans usually have better interest rates and if you pay off the loan early, you’ll owe a steep fee. This will prevent you paying off the loan early.
Credit Score
As always, credit score plays an important role in any of debt transactions. There is no point of applying for a new mortgage if you don’t have a good credit score as well as an manageable debt service ratio. Go through your credit report. If your credit score has improved since you’ve taken your original mortgage, you are in a very good position and you have a better chance of getting your application accepted.
A good credit score also puts you in a good negotiating position to get better rates.
Equity in Your Home
When it comes to refinancing a mortgage, some lender agencies take a look at the amount of equity in your home. The more equity you have, the better chance you have at getting a refinanced mortgage.
There are many factors you should be aware of such as loan terms and adjustable rate mortgage, but the above points are the main ones. It’s important you don’t over think the decision. The main question you should ask is ‘Can you afford paying for another loan?’
