7 Questions to Ask Before Refinancing a Mortgage
Property owners of all types often use mortgages to manage purchases of real estate. In some cases, the original financing works fine and there’s no desire to refinance. Others may find that mortgage refinancing becomes a helpful way to restructure debt and possibly get a few other things done.
If you’re wondering if refinancing the mortgage on your home or your place of business is a good idea, take a moment and ask yourself the following questions. The answers will help you decide if this really is the right financial move for you.
What’s Your Motivation for Refinancing?
Refinancing just for the sake of doing so accomplishes nothing. Identify every reason that you think refinancing would be best for you. For example, do you have an adjustable rate mortgage with a fixed term that’s about to expire? Do you think locking in a fixed rate now would allow you to pay less interest over the life of the refinanced loan? If so, then refinancing makes sense.
Maybe the opposite is true in your case. You have a fixed rate mortgage now but believe that rates will drop well below that figure in the years ahead. If so, refinancing with an adjustable or variable rate mortgage would position you to take advantage of those lower rates.
How’s Your Credit Score?
When was the last time you took a good look at your credit score? Keep in mind you’ll need to check with more than one credit bureau. The goal is to get an idea of how high the score is and if there is any incorrect or outdated information on the reports that may be adversely affecting the score.
Why does this matter? Your credit score is one of the first things that potential lenders will evaluate. If there’s something you can do to boost the score offered by each credit bureau, now is the time to do it. Higher scores translate into the potential for better refinancing rates and terms.
How Much Equity Do You Have Right Now?
Equity is the value of the interest you have in the property. Every loan payment you’ve made up to this point has increased the equity. Since you need to have at least a 20% equity in the home for most lenders to consider offering refinancing, knowing this figure before you approach any institution is in your best interests?
Why do lenders care about equity? Simply put, more equity means that the lender is taking on less risk by providing the financing. Should you default on the refinanced mortgage, the odds of being able to recoup the entire amount owed is much higher.
Would You Prefer an Adjustable or a Fixed Rate?
As with first mortgages, refinanced mortgages can include a fixed or an adjustable rate of interest. There are benefits to both options. Your goal is to decide which one would work best for you.
The easiest way to project the best possible outcome is to run the numbers. Assume the fixed rate that you’re most likely to be offered. Use it to project how much you will repay the lender over the mortgage term. Once you have that amount, do the same, but only with adjusting rates that you think are most likely to apply over the term. From a financial standpoint, the projection that saves the most money will be the one that you want to choose.
Aside from the financial aspect, there’s also the comfort factor. Perhaps you aren’t comfortable with an adjustable rate. This may be true because you’ve been surprised by market movements in the past, and not in a good way. If so, the reliability of a fixed rate may allow to sleep easier at night.
Can You Absorb the Costs of Refinancing?
Whatever type of refinancing you’re seeking, know there will be some costs associated with the new arrangement. The amount and type of those costs will vary based on how much you need to refinance, the lenders policies and procedures, and the terms found in the loan contract.
You’ll find that professionals like Cody Krieser industrial and commercial mortgage broker can help clients identify all up-front and recurring costs that will apply. If you can handle those expenses and still come out a little ahead, proceeding with the refinancing does make sense.
How Will You Find the Right Lender?
There are plenty of lenders to consider. Whether you want residential or business refinancing does limit the options somewhat, but you will still have quite a few lenders to evaluate. The task may seem overwhelming when you begin to look at all the prospects.
Help from a mortgage broker is one way to go. Brokers typically have working relationships with multiple lenders. That makes it easier for them to assess the particulars of your situation and then approach lenders who are the most likely to give the application serious consideration. In terms of streamlining the process, this approach is hard to top.
What Will Refinancing Do to Strengthen Your Financial Position?
Finally, make sure you understand what refinancing will do to improve your financial stability. This will likely overlap with your motivations for wanting to refinance, but it could mean identifying some additional benefits that were not considered before. From alleviating stress on the budget to allowing you to save money on interest, the financial benefits could be greater than you first realized.
There is no one right answer when it comes to mortgage refinancing. Even if you’ve seen others benefit from this solution, it doesn’t mean it’s the best approach for you. Consider the move carefully and know what to expect in the way of benefits and challenges. Once you’re sure that refinancing would help rather than hinder you, seek out a broker who can help you find the right financing. Diligence now will pay off in the long run.