The number one biggest American expenditure is housing. In fact the average person or family spends $16,895 per year on it. That’s about 26.9% of yearly earnings for a middle class family. Since this is such a large chunk of what we spend money on, it’s time to look at how we can save by way of refinancing.
Knowing when to refinance is not an easy decision. How do we know when is the right time and if it’s even worth the risk? First step is to assess the need for a refinance. A lower interest rate flashed on TV doesn’t always mean you should jump at the chance. Any homeowner can tell you there is a significant risk involved. Things to look at before considering a refinance include knowing your credit score, your debt to income ratio, income stability, how long you’ll be living in your home, large outstanding debts, property value, and what plans you have for the future.
Let’s first break down these categories and examine them. Credit score is a huge indicator as to whether that 3.75% APR, for example, is obtainable. If you have questions about credit score I encourage you to check out my article on “Tips To Improve Credit Score”. Debt to income ratio refers to what you have being paid out versus how much money you have coming in. If your debts come close to or exceed your income, a lender will see you as high risk and up your APR. Income stability refers to your household employment situation. How long have you been employed with the same company? Could your job position be prone to layoffs? A secure job equates to a lower APR. How long you live in your home matters also. It doesn’t make sense to refinance under a 30 year mortgage if you’re only going to be living in the same place for 5 years. Next, if you have large debts weighing you down, say over $5000 in unsecured debt, a refinance could make sense because unsecured debts in excess of $5000 entice lenders to wipe that debt out in the refinance, adding value to the loan and making lenders want you. That doesn’t mean you should charge up your credit cards, (remember that credit score matters), just that you’ll be more appealing to lenders. With property value, even if you do get a good interest rate, you may not get the benefits because your property value has dropped. Knowing that ahead of time will tell you if it’s worth it. Also, remember that getting your home/property appraised costs money, typically in the $500 range. Finally, what are your plans for the future? How long do you expect to live in the house? Do you plan to change jobs or relocate? Do you plan on having a new baby? Answer those and you’ll have a better understanding of if a refinance makes sense.
Here are some other things to know about refinancing your home. Unless you’ve been in your current mortgage for no less than 2 years, don’t bother even looking into refinancing. It’ll be next to impossible for a lender to even want to talk to you if haven’t got those 2 years under your belt. Also, people with a second mortgage or a home equity line of credit really should consider a refinance. More often than not, the refinance will roll those extra debts into 1 new mortgage cutting down on unnecessary interest spending. And, doesn’t 1 monthly payment sound better than 2 or 3? Then, know that there are dozens of types of mortgages. When speaking to a lender, ask about a wide variety of options from fixed APR’s, to ARM’s, to reverse mortgages, to half-n-half’s, to interest only loans, to a modification loan, and more. But before you get into the nitty gritty details of a refinance with just 1 mortgage broker, shop around for the best deal. Talk to numerous lenders; get them competing for your business. Be sure to stay clear of mom and pop lenders. Your home’s reputation, your credit reputation, your wallet is on the line. Your lender should have a standing reputation that matches the risk you’re putting in.
A mortgage lender will try and tell you refinancing is easy, but truth is they only say that to get your business. Refinancing is not only a tough decision to make; it’s also a rigorous process. Do your homework to see if a refinance is smart. By scrutinizing your financial situation combined with figuring out your plans for the future, you’ll know before a lender does whether or not you’re eligible and if you can save money. However, if after you’ve done all these things you learn that refinancing will save you, don’t hesitate. Interest rates won’t stay low forever, and now is prime time to take advantage of it.
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