When it comes to refinancing a home, there are many factors you need to put into consideration. Remember, the decision to refinance is one of the biggest financial decisions you will ever make in life; therefore, a cautious approach is critical. Firsts things first! It is critical to know why you are refinancing your home in the first case as well as how refinancing will affect your financial situation. By the way, the process of refinancing is not a one day event. Rather, it involves some long processes.
One of the factors that might influence you to consider refinancing is when you are having difficulties in repaying your loan. In essence, you are trying to find a way to continue repaying your loan without falling behind in repayments. This is the best way to avoid foreclosure and bad credit ratings. For instance, you could consider refinancing if your source of income has reduced for one reason or another. On the other hand, you can also refinance if you want to increase your monthly repayments if you have extra source of income. This is advantageous because you will end up paying lower interest rate if you shorten the term of your mortgage. Hence, refinancing becomes necessary when you either want to reduce or increase the term of the loan.
Another factor that might influence you to refinance your home is drop in interest rates. This is a nice way of saving, but you need to consider the time remaining and the closing cost involved. It is advisable to consult widely before making this decision because it is not a must that you will save money when you refinance as a result of lower interest rates. As a matter of fact, the gap between the new and old rates should be big enough to make a long term effect after factoring in closing costs like re-valuation fee, legal fee, and negotiation fees among other costs. Most banks will charge you repayment penalties. This is where you’ll need to make your break even analysis to determine whether it makes financial sense to refinance. A break-even point is the point where the savings outweigh the closing costs.
Credit score is also one thing that can influence you to refinance a home. If your credit score has improved, you definitely qualify for lower interest rates. This should be no brainer but the same principles apply, that is, the term of the loan remaining and the closing costs. It would not make any sense to start the process of refinancing when you have only two year left out of a 30 year-old mortgage.
Finally, an option that could determine whether you can refinance your home is the length of time you intend to stay in your home before you can sell it. It is not considered safe to sell your home soon after refinancing it because it will be costly.
Considering the above, refinancing should be done with clear objectives in mind, and after factoring in all the options you have. Please talk to your real estate agent before making any decision.