Homeowners are considering refinancing their mortgage for a number of reasons. Some are in hurry to refinance to lock in lower interest rates, while others refinance to get rid of private mortgage insurance for a lower fee or use equity to consolidate debt.
Since historically low mortgage rates are still low, refinancing your home can make a lot of financial sense in order to get the best rate and term. Recently, the average fixed interest rate on a 30-year mortgage has hovered below 3%. according to Freddie Mac… If you are considering refinancing your home, you can explore mortgage refinancing options: visit Credible compare rates of mortgage lenders.
However, for some home borrowers, refinancing may be a bad idea. Read on to find out when this is a bad idea to avoid potential mistakes.
1. Poor credit history or credit score.
If your credit rating has dropped since you applied for your first mortgage loan, your mortgage refinancing rate may be higher than your current mortgage rate. Also, if your credit rating has dropped too low, you may not meet the minimum credit rating requirements for refinancing your loan.
For example, if you have a Freddie Mac or Fannie Mae loan, the minimum credit rating required for some mortgages is 620.
2. Cost of fees
Similar to getting your original mortgage, mortgage refinancing sometimes comes with closing costs. These closing costs can be applied to different types of mortgage loans such as VA loans, FHA loans, or USDA loans. Although closing costs are usually between 2% and 5%, the amount you pay depends on the lender.
For example, if your closing expenses are 5% on a $ 120,000 mortgage, you would have to pay $ 6,000. Depending on your financial situation, this may not be available to you, especially if it means depleting your emergency fund.
3. You will move soon
If you are planning to sell your home soon, the short-term costs of refinancing may outweigh the benefits such as a lower interest rate. The longer you stay at home, the more likely you are to break even. This is when the savings you get from refinancing your mortgage negates the cost of commissions.
4. Your new monthly payments will be too high.
Changing the loan term can save money due to a lower interest rate, but it can increase the mortgage payment. To save the maximum amount of interest, some homeowners choose to refinance their 30 year fixed mortgage with a 15 year fixed mortgage. This can cut the amount of interest you pay over the life of your mortgage in half. However, it can also double your monthly mortgage payments.
If you cannot afford the new monthly home loan mortgage payment, it increases the risk that the lender will foreclose your home loan. Before refinancing a short-term loan, use online mortgage calculator to determine your new monthly expenses. This way you will know if the new spending is in line with your budget.
5. Debt Consolidation
If you refinance a mortgage with a view to debt consolidation, you can refinance with cash payment. This includes getting a new, larger loan to use your existing equity capital. Your lender will pay you the difference between the larger loan amount and your existing cash mortgage loan.
While this can save you money, it does come with certain risks. For example, if you are struggling to pay off a larger loan or default, it could ruin your credit and you could lose your home.
6. Your mortgage rates are still low.
If your refinancing rate is comparable to today’s mortgage rates, you may not be able to save much by deciding to refinance your mortgage. Before refinancing your mortgage, compare your current mortgage rate with the average interest rate.
The average rate on a 30-year fixed-rate mortgage at the beginning of June was still hovering just below 3%.
Over the past month, mortgage rates have tended to decline. To check if today’s rates are lower than your current one, visit Credible for simultaneous comparison of rates of several lenders for mortgage refinancing.
While some homeowners can save a lot of money by refinancing their mortgage, that doesn’t mean it’s a good idea for every homeowner. Refinancing your mortgage can be a bad idea if you have a poor credit rating, cannot afford fees or new monthly payments, or stay in your home long enough to enjoy the benefits.
Before refinancing your mortgage, analyze your unique financial situation to see if it makes sense. If it is true, Online commission tool Credible can help you easily compare multiple lenders and see prequalified rates in just three minutes.
Have a financial question but don’t know who to contact? Write to the Safe Money Specialist at email@example.com and your question can be answered by Credible in our Money Expert column.