Ryan Guina is an entrepreneur and writer. He has worked for Fortune 500 companies and served six years in the USAF. He writes about money management and small business topics at Cash Money Life and military money topics at Military Finance Network. You can follow his twitter feed.
If you are interested in refinancing your home because of the historically low mortgage interest rates now being offered by mortgage lenders, you need to be sure refinancing is for you before proceeding. In some cases, a refinance may be just the thing you need to do but in other cases a refinance can do more harm than good.
When Refinancing is the Answer
If you have been keeping up with your mortgage payments and all of your other financial obligations, a refinance to a low interest rate may be in the cards for you. Depending on the balance of your mortgage, your credit score and your credit history, a lender may find you are qualified for a lower interest rate on your mortgage. This could mean the balance you have left to pay off on your home at a lower rate would result in lowered monthly payments on your mortgage and potentially even a faster payoff. Some homeowners choose to refinance their mortgage because initially, they chose an adjustable-rate mortgage and now want to secure a fixed-rate mortgage.
There are several factors that affect mortgage rates. To qualify for a lower interest rate, you must be able to meet the lender’s mortgage requirements, such as having a good credit history and score. You’ll also want to have stable employment and proof of income. Along with meeting the application requirements, you will need to be able to cover the closing costs incurred by the new loan.
When Refinancing is Not the Answer
If you are struggling to keep up with your mortgage, have missed a payment on your mortgage or other bills, a refinance may not be worth it. A lender may deem your rocky financial situation a risk and not grant you a refinance option at a lower rate.
You also may not want to refinance when there is not enough equity in your home because you may find it difficult or expensive. However, it may be possible to do an underwater refinance under the right circumstances.
Where to Start
If your credit is stable and you think refinancing may be right for you, you’ll need to start shopping for mortgage rates. It is possible that your current lender will be willing to offer the lowest interest rates. Start with them, since you already have a history together, if you have been 100 percent in your timely payments and customer loyalty.
Looking outside of the lender, check with other local banks and credit unions for rate comparisons. Be wary of agencies online and offline that are advertising great refinance rates. Stick with companies you trust rather than risk a scam. There are many sites that include rate comparison charts on a weekly basis so consider checking those out to find other lenders in your area offering great rates.
Also, make sure you know where you stand credit-wise. Although you may have been excellent in your payment histories with creditors, it doesn’t mean the credit bureaus haven’t reported erroneous information on your history that has subsequently dropped your score. Order copies of your credit reports and score. If your score is not 720 or higher, consider waiting to apply for a refinance and try improving your score to ensure you get the absolute lowest rate available on a refinance.
You missed a very important aspect of refinancing…that is, ‘does it make sense to refinance’?. Brokers and mortgage finance companies will take your money all day long but sometimes it just doesn’t make sense even if the rate is substantially lower. Do your homework, make sure you know exactly what you are paying and what you’re spending for the life of the loan. ie I’m paying a relatively high rate but only have a five years left on my mortgage so my mortgage payment is mostly principal. Make sure you check your amortization schedule and understand what you are paying!!!