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You can thank the coronavirus for the record low mortgage rates that were just put into play. While many people are taking advantage of them to refinance their mortgages and save money every month, there are some questions you should answer before doing the same.
1. Will I be living in my current house much longer?
Mortgages usually aren’t short-term loans. They’re often paid back over several years or even decades. And most of your initial mortgage payments will go towards paying down the interest and not the principal.
In addition, refinancing a mortgage often comes with fees that can cost thousands of dollars. Although you can save on your monthly mortgage payment, you want to ensure that those savings cover any costs associated with the new loan.
In short, if you aren’t planning on staying in your home for at least five years, you may be better off sticking with your current loan.
If you refinance it and move shortly after, you won’t be able to enjoy any of the monthly savings that can keep more money in your pocket in the long run.
2. Is my application likely to get approved?
If you know that you’re currently saddled with debt, have missed a lot of payments, and your credit score has plummeted recently, the chances of your refinance application getting approved are small.
LendingTree found that approximately 25 percent of refi applications get denied, and this can be linked mostly to high debt-to-income ratios and poor credit.
Before you take the leap to refinance your mortgage, try to clean up your financial situation so you don’t end up wasting your time. A couple of tips to achieve this goal are to:
- Check your free annual credit report for any errors and report them.
- Pay down any non-mortgage debts.
If you need financial assistance such as money to pay bills, a personal loan, or debt relief. See what resources are available to help you today.
3. Can I avoid mortgage insurance?
If you have a Federal Housing Administration (FHA) loan or put less than 20 percent down on your home, you’ll have to pay mortgage insurance. This can take a chunk out of your budget every month, and it’s an expense you want to avoid.
If you’ve reached the point where you have 20 percent equity in your home, a refinance can make sense since you can skip out on mortgage insurance.
4. How much can I save?
You don’t want to refinance your mortgage if it will end up costing you more money, or the savings will be insignificant. To avoid this, try to follow the rule which states that your new interest rate should be 50 basis points lower than the old one.
How can you find the lowest rate possible to satisfy that rule? Shop around with several lenders instead of simply paying attention to average rates posted by Freddie Mac.
Shopping around also lets you see which lenders offer the most savings when it comes to closing costs. Combine this information with the new, lowest rate you can find, and you can see how much you’ll save and whether or not refinancing is worth it.
5. Can my current lender beat it?
You may not have to use a new lender to refinance your loan, which could make it a much easier process since they already have all of your information. Let them know you’re shopping around, and they’ll likely do their best to give you a great deal.
By getting the savings you want and simplifying the process, answering this one question could make refinancing your mortgage a no-brainer.