Top 3 Ways To Refinance Your Home
Point of Interest
Refinancing your mortgage can be stressful and it’s important to do it in the right way. Weighing the best ways for how to refinance a house ensures you end up in a better position afterward.
Refinancing a house can be a great way to save some money on your mortgage. While there are many reasons to refinance, the primary goal of refinancing a home is often to reduce your interest rate and build equity faster. By refinancing to a lower interest rate or to shorten the loan term, you could save thousands of dollars in interest.
However, refinancing a house isn’t always the best option for everyone and mistakes made during the process can be costly. It’s important to know what to avoid and how to refinance your home the right way.
How to refinance your mortgage the best way
There are plenty of factors to consider when refinancing your mortgage, including loan types, terms, interest rates and refinancing methods. The best option will depend on a variety of personal circumstances, but there are some ways you can get the most out of your refinance deal, including:
Have a clear financial goal in mind.
Refinancing just because interest rates are low may not be the best move. You should have a clear financial goal in mind before refinancing. This will help you decide whether refinancing is the best option for you.
For example, if you aim to save money over the short term, refinancing from a 15-year mortgage to a 30-year mortgage can help you save on your monthly mortgage payments. It also extends your loan term, though, which means you’ll pay more in interest over the long haul.
On the other hand, if you are looking to pay your loan quickly and build equity, refinancing to a shorter loan term could make sense. It will, however, increase your monthly mortgage payments.
Research different types of refinancing.
There are several different types of refinancing, each suitable for different scenarios. For example, a rate and term refinance allows you to lower your interest rate, change your loan term or both. With this type of refinance, you can take out a new loan with a lower rate or switch your loan terms from a 30-year loan to 15-year loan — or any loan term that suits your needs.
An FHA Streamline refinance, on the other hand, is a refinance loan for homeowners who already have an FHA loan and want to reduce the interest rate on their loan in a quick and easy way.
A cash-out refinance will allow you to draw cash from your home’s equity and secure a lower interest rate, though you’ll be paying back any money you borrow from the home’s equity, with interest, which can make the cost of your home increase over time.
Consider a shorter loan term.
Shortening your loan term with a refinance means you will be making larger monthly payments to pay your home off more quickly than you would have with your original loan. However, this allows you to pay your mortgage off and build equity faster. It also reduces the total amount of interest you would owe if you had a longer-term loan.
Weigh how long you plan to live in the home.
Having an idea of how long you will live in your home is crucial to your refinancing decision. Planning to sell your home within five to 10 years will affect which type of mortgage refinance is best for you. You may even realize that refinancing is not worth the cost and hassle because you won’t be staying in the home long enough to break even on the closing costs.
How to get the best rates when refinancing your mortgage
There are a number of ways to ensure you get the best interest rates when you’re refinancing your home, including:
Shop for the best refinance rates.
When it comes to refinancing your home, it’s always wise to do thorough research and shop around for different rates from different lenders. Interest rates vary from lender to lender, so you will want to get an estimate from a number of them to see how much refinancing would cost and who’s offering the best rates.
Check your credit score.
Your credit score can determine whether refinancing is a good move for you. Homeowners with poor credit scores may not be eligible for the best refinancing rates. In this case, any savings could be minimal — or you could end up in a worse position by refinancing.
However, credit score errors are fairly common. If your score seems wrong to you, it might be worth checking for errors to get a more accurate score. You can dispute any inaccurate information on your report, but this can take a while, so make sure to start the process as early as possible.
Reduce your loan term.
While shortening your loan term could increase your monthly payments, it may allow you to access better interest rates on your loan. Some lenders will offer lower interest rates on shorter term loans, but it will vary depending on the lender.
Avoid taking cash out.
In some cases, you may be able to get a cash-out refinance. This allows you to draw out some of your home’s equity as part of the new loan deal. It’s tempting to tap into equity to withdraw cash while refinancing, and sometimes this can be a smart move. For example, if you remodel your kitchen with the cash, it can help to boost the value of the property when you sell.
The problem is that this increases your loan-to-value ratio, which can result in a loan with higher interest rates depending on the lender you choose. So, if possible, avoid refinancing to a cash-out loan to keep your interest rates as low as possible.
The final word
Refinancing a property has plenty of benefits, but it’s not for everyone. Determining how much you will save and weighing whether it’s worth the cost of refinancing is important. If you opt to refinance, be sure to shop around and do your research to get the best rates possible. Lenders offer a wide variety of interest rates and loans. Make sure you consider all options before making a commitment to a new mortgage.