A home is usually a person’s biggest purchase and investment in their lifetime. Finding the right loan (because who can pay cash?!) is key to making wise financial decisions. Once you get a loan, the interest rate might not be fixed, or interest rates might decrease over time, so you want to consider getting a new loan or refinancing.
As with any loan application, start with your credit score. The higher (and better) your credit score, the better rates you will get. A higher credit score is earned mostly by paying your debt on time, having little or no debt, and having a low debt to earnings ratio. A credit score of 700 out of 850 is considered good.
You can get your credit report and score for free every 12 months, or monthly with on credit card statements.
The cost of refinancing
How long will you stay in your home? The longer you stay in your home the more it is worth it for the costs.
Refinancing is not a free transaction. It can cost 2%-5% of your loan amount. The common fees for refinancing are application fee, originating fee, credit report fee, home appraisal fees, home inspection fee, flood certification fee, title search and insurance fee, recording fee, and reconveyance fee.
To make refinancing worth the effort, the standard is to be able to make back the cost in five years.
Like anything else, shop around and compare costs. You can also negotiate these costs, some lenders might be able to reduce or waive certain fees.
A “no-cost” loan doesn’t mean it is free but rather it has its fees folded into the life of the loan, or a higher interest rate, which could be more costly over time. It is a good choice if you don’t have the out-of-pocket fees.
- One of the best reasons to refinance is to get a lower interest rate on your home loan which could save you thousands of dollars a year. To see how much a different interest rate could save you or cost you, use this calculator.
- Refinancing at a lower rate will also give you the opportunity to shorter the length of your loan, which might raise your monthly payment but save you money overall. If you can afford a slight uptick in your payment, this might be worth the money.
- A lower interest rate is definitely the time to get rid of an adjustable-rate mortgage if you plan on staying in your house. ARM loans usually start at a lower interest rate, but can flex to go higher with the economy.
- If you have higher-interest credit card debt, for example, you can take out some of your equity out at a lower interest rate and pay off (and not use again!) higher interest debt.
As with any loan application, start with your credit score. The higher (and better) your credit score, the best rates you will get. A higher credit score is earned mostly by paying your debt on time, having little or no debt and having a low debt to earnings ratio.