When you refinance a home loan, you change your existing lender and get a new one. In most cases, the existing lender would be charging a high rate of interest, and the new one would offer a lower rate. Refinancing has several financial advantages. It can save money, but there is no guarantee. You can end up losing money too. So it makes sense to ask yourself a few questions before you take the plunge.
Am I taking a calculated risk?
Bad things can happen at any time. This goes for refinancing as well. You may refinance your existing loan thinking that you will start saving money after a couple of years. However, a family emergency or a natural disaster may force you to move. In relocating shortly after refinancing, you will end up losing money. No one can predict the future. But it is possible to make an educated guess. Ask yourself if you are prepared to deal with any possible emergencies.
Am I refinancing because my friends have done it too?
Refinancing has become a trend. A lot people think they will be left behind if they did not refinance their existing mortgage. It is possible that your friends refinanced because it reduced their rate of interest by two per cent, or even more. If you are already paying to a lender that charges a low rate of interest, it does not make financial sense to refinance. A rule of thumb is to go for refinancing only if the new interest rate is at least one percent lower. Also, check out the actual value of your house using a reliable source like Home Loan Advisor.
Will I really save money?
Refinancing means transferring your existing loan to some other lender. It can cost between three and six percent of the loan amount to refinance the mortgage. Prepayment penalties and documentation may cost you a lot of money. It is prudent to ask yourself how long it will take before you start saving money because of refinancing. If the time period spans more than a few years, it’s better to rethink.
Can I spare time for a refinance?
Refinancing demands time. You will need to negotiate with different lenders to secure the best rate of interest and the best repayment period. It takes time to go through all the documentation of a new loan. If you cannot spare time to even scratch your head, it is a better idea to put refinancing on a hold. Even a small mistake here can cost you a lot.
Do I have a satisfactory credit score?
Your credit score plays a big role in getting a low interest mortgage. If you are thinking of refinancing, ask yourself: āDo my credit scores make me eligible for a mortgage with a low interest rate?ā It is a good idea to go ahead only if your score is at least 720. For those with credit scores of below 620, refinancing will have to wait, as lenders will be wary to refinance your mortgage.
So evaluate yourself with these questions before you enter the refinancing market!
