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With the current onslaught of commercials and billboards encouraging homeowners to refinance their homes and free up much-needed cash, you may find yourself wanting to follow the crowd. Nearly two-thirds of all mortgage applications are requests to refinance an existing loan. Before you endanger your nest, here are six tips that will help you better determine if refinancing is in your best interest.
Do your homework. A quick flip through the real estate section of your local paper will help you identify current interest rates. If you choose to stay in your home for more than three years, search for a fixed rate. For shorter stays, choose an adjustable rate.
Is it worth it? After determining your new interest rate, compare it to your existing rate.
Understand the full scope of your decision. When refinancing, you will incur fees. Get a Good Faith Estimate of Closing Costs, which will list the various fees you will be charged. You will most likely incur closing costs that are on average between 3 and 6 percent of the loan amount.
What are your intentions? It’s important to remember that just like any other loan, the money you receive from refinancing will have to be repaid. Do you plan on using the cash to pay off other bills such as credit cards and loans that have higher interest rates? It may come as a surprise to you that a lot of financial advisors caution against this because the debt is oftentimes incurred again.
Buyer beware. A lot of companies claim to be able to help you successfully refinance. Make sure you’re dealing with a reputable company. You may find that your initial low payments will balloon into much higher payments. Whenever tapping into your home’s equity, your home is at risk.
Know your score. According to Fair Issacs, if your credit score is 650 or higher, you will qualify for a lower interest rate than someone with a score of 500, but you won’t net as sweet a deal as someone with an 850 score. Request a credit report and check for inaccuracies. Correcting inaccurate information on your credit report will boost your score and help you qualify for a much lower interest rate. – adam jones
