Low interest rates may have you thinking about refinancing your mortgage. This can be a smart choice, because a refinance can help you pay your mortgage off early, lower your monthly payments, decrease the total amount of interest you pay, get cash for home improvements or debt consolidation, or all of the above.
But what do you need to do to prepare for a refinance? It’s not that different than the work you did to prepare to finance your home purchase. Let’s look at what to do before you start your mortgage refinance application.
Assess Your Current Situation
First, find out if refinancing makes sense for you by calculating your “total mortgage cost.” This is the total interest and other mortgage-related fees you will pay over the life of your loan. Add up all mortgage-related expenses for each payment period to find your mortgage total cost.
Knowing the total mortgage cost will help you compare it with a mortgage refinance offer.
Decide your Refinance Goals
Your next step is to decide on what you want to accomplish by refinancing.
- Do you want to get a mortgage with lower monthly payments?
- Do you want to pay off your mortgage faster?
- Do you have equity in your home that can be borrowed against for home improvements or other expenses?
- Do you need cash for some reason, such as paying your children’s college tuition or consolidating credit card debt?
Knowing your mortgage refinance goals will help you and your mortgage professional work together to find the right loan for you.
Calculate Your Home’s Current Equity
When you apply for a refinance, you will likely need to get a new appraisal to ensure that your home’s value will fit within your refinance goals. But you can get a sense of your home’s value by looking at recent sale prices for similar homes in your neighborhood.
Check Your Credit
Your credit plays a role in mortgage refinancing, just like when you first purchased your home, so it is necessary to check your credit report and make any corrections if needed. You can get a free copy once a year from each of the three credit reporting agencies at annualcreditreport.com. (Other companies offer credit reports, but they may be part of an expensive membership.)
If there are mistakes on your report, or accurate negative items, you may need to address them before you apply for a new loan. For example, if you have late or missed payments, be prepared to explain the reason. And make sure to make your payments on time going forward.
Talk with Your Family about Your Budget
When you refinance, you may see some big shifts in your budget. For example, if you pay off a sizable debt, you’ll probably have much more disposable income each month. It can be so easy (and fun) to increase your family’s spending to match. But if you’re hoping to save more for the future, make sure everyone in your family is on board with that goal so that a change in spending habits doesn’t eat up your savings plan.
Plan for Closing Costs and Other Fees
When refinancing your mortgage loan, you will have to pay closing costs and fees associated with getting a new mortgage loan. You can choose to pay these out of pocket or roll them into your mortgage loan.
Remember, your Homeowners Licensed Mortgage Professional is here to walk you through all of these steps and answer any questions along the way. If you’re interested in learning more about refinancing, simply reach out!