The recent economic downturn has caused many folks to worry about their money, but there is at least one potential bright spot: lower interest rates. For homeowners, this means that it may be time to consider refinancing your mortgage. Refinancing can give you an opportunity to lower your monthly mortgage payments and save money by paying less interest over the term of the loan.
Here are six tips to consider if you are thinking about refinancing your mortgage.
- Check Your Credit Score: To determine if you qualify to refinance at a lower rate, lenders will look at any outstanding debt, such as credit cards, student loans or delinquent bank accounts. They will also check to see if you make your mortgage payments on time, which is a sign that you will reliably make future payments.
- Shop Around: Your current lender can work with you to refinance your mortgage to keep you as a customer, but they might not be able to compete with the lower interest rates offered at other lending institutions. Do some research to find a new loan with terms and an interest rate that works best for your financial situation.
- Be Prepared: To make the refinancing process as seamless as possible for you and your lender, gather all necessary paperwork — pay stubs, bank and credit card statements, tax returns, and other key financial documents — before you start.
- Understand the Terms of Your Loan: Understanding both your current mortgage and the one you are pursuing is necessary to make smart, beneficial choices about refinancing and avoid “buyer’s remorse” down the road.
- Lower Your Interest Rate: Most experts agree that if you plan to stay in your home for many years, it is worth the initial upfront cost to reduce your interest rate. But do the math to make sure that the amount of money that you will save in interest over the expected repayment period will be more than the cost of refinancing.
- Remember that a New Loan Usually Restarts the Clock: You might reduce your monthly payments with a lower interest rate, but your savings may not add up if your new loan keeps you in debt longer (an extended loan term means more monthly payments). For this reason, consider shortening the term of your new loan by paying a little more each month. You could even continue making your old mortgage payments against the new loan, and thereby use your refinancing savings to pay down your principal. You might also consider a loan with a shorter term to begin with, but this may affect available interest rates.
A Certified Financial Planner (CFP) professional has the knowledge and experience to help you build a refinancing plan tailored to your financial needs and can help evaluate your different loan options. To find a CFP professional near you, visit letsmakeaplan.org.
Refinancing your mortgage can be a smart way to boost your savings and positively impact your overall financial plan. Be sure to lay the groundwork for the maximum benefits.