Homeowners often take the opportunity to refinance their mortgage when they find lowered interest rates or have improved credit scores. According to data from 2016, household income has grown by 28% in the past 13 years, but in that time the cost of living has gone up by 30%. Refinancing can sometimes ease the financial strain on families by reducing monthly loan payments, but if it isn’t done right refinancing could make matters worse.
The Dos of Refinancing
- Do tidy up your finances before refinancing. In order to be approved for a refinanced loan, your financials will have to be in great shape. Just because you were approved for the initial home loan doesn’t mean you will be approved for one again. Take time to pay off as much other debt as possible, build a positive repayment history, and make sure that your income-to-debt ratio is good.
- Do perform a thorough cost comparison first. Before you sign on to refinance your home loan, make sure that you will actually be saving money. Refinancing often has other costs such as establishment fees for the new loan and closing fees for the old loan.
- Do refinance if your new loan is shorter and has lower interest rates. To be truly saving money after these fees, the interest rates on your new loan must be significantly lower than on your old loan. The new loan should also be for the same length of time or shorter if possible. A longer-term loan may give you lower monthly payments, but the accumulated interest will always mean you end up paying more.
The Don’ts of Refinancing
- Don’t refinance your home for more than its market value. When a lender offers a loan that exceeds your home’s value, they charge much higher interest rates. You may not be able to deduct the interest you’re paying on this type of loan, possibly preventing you from making payments and leading to a foreclosure on your home.
- Don’t rely on advertised special offers. It’s tempting to sign up for a refinanced loan when they have special offers or honeymoon rates, but it could end up costing you more. The rates will be advertised as extremely low for the first few years, but after the honeymoon period, they will revert to the standard, less advantageous rates.
- Don’t refinance because of pressure from a debt collector or credit card debt. A debt collector will try to intimidate you to refinance because they want to get paid, and if you decide on the first refinance loan offer you see you may end up owing more. Refinancing because of credit card debt may seem like a quick fix, but if you get behind on the payments you could lose your home.
Ultimately, you should refinance your home loans because you know it will save you money and make your life easier. Make sure to bust out your calculator and do in-depth research before signing that loan agreement, and you’ll be saving money in no time.