Questions to Ask Before Refinancing (Refinansiering) a Mortgage
In theory, refinancing your mortgage is a perfect idea to provide you with lower interest rates and the ability to repay everything faster. This is especially important when rates are falling, which will offer you peace of mind.
However, it would be best to understand a few things before you determine the best course of action. The first question you should ask is how much equity your house has in the first place. Remember that equity is the difference between your household’s value and the amount you owe.
According to regulations, you require at least twenty percent equity to qualify for refinancing without paying PMI or private mortgage insurance. When you add PMI to the overall expense of a new loan, you will not get the benefits you wanted in the first place.
Therefore, before choosing any step, you should determine whether you have equity or not. Home values have been increasing in the last few years, meaning you may have more significant equity than you previously thought.
Suppose you wish to get a cash-in to refinance. In that case, you should consider home equity to determine the amount you will get in the first place.
Do You Have a Good Credit Score?
Of course, you can find loans specifically created for people with credit scores on the lower end, mostly below five hundred. For instance, the FHA loan is one of them. However, finding the best refinancing product with a lower score is challenging, which is an important consideration to remember.
Everything happens because of an economic fallout due to the COVID19 pandemic, affecting the credit market. As a result, lending institutions increase the requirements regardless of federal government guidelines and programs.
Therefore, the Mortgage Bankers Association’s survey states that loans became highly unavailable when comparing the last few years. The pandemic created uncertainty and risk in the economy, which is why mortgage lenders responded accordingly.
Since the supply was reduced for all lending options, that led to investors’ pullback; nowadays, only people with high credit scores can get refinance (refinansiere gjeld), which is an important consideration to remember.
As you can see from everything mentioned above, it is vital to boost your credit score before applying for any loan. You can do it by repaying the debts on time, handling bill payments without getting late, and increasing the income, among other things.
What Are Your Financial Goals?
Determining why you wish to undergo a refinance process is the essential step that will help you with the process. Household owners want to refinance for numerous reasons.
We can use different examples such as securing a lower rate, taking equity out of the house to pay for renovation or improvements, reducing payments term, and consolidating high-interest debt into a single charge.
One of the biggest reasons is to reduce the monthly expenses, which will help them increase overall cash flow. Suppose this is your goal. In that case, we recommend you check out various online mortgage calculators that will determine the new monthly payment you can expect after you finish with the process.
Others decide to refinance to obtain a shorter-term loan, which will come with more significant monthly payments. Still, you can reduce overall interest expenses and repay everything faster than before. That way, you can swap a thirty-year for a fifteen-year loan, which is the simplest way of reaching your desired goals.
We recommend you find a mortgage broker with whom you can discuss why you wish to refinance, which will help you get a product that will meet your requirements. Another important indication is determining whether you want to retire without a mortgage before signing a new deal that will add more years.
For instance, you can refinance your current loan by taking a brand-new thirty-year option, meaning you will start from the beginning and not the moment where you left off. That way, you can complicate your efforts to boost your financial goals because you will pay higher interest in the long run.
Therefore, when you decide your mortgage, we recommend you determine your current employment and whether it will change as time goes by. That way, you can decide whether or not it will be worthwhile to take a longer or shorter option.
How Long You Wish to Stay in Home?
Refinance fees are expensive and require between two and three percent of the overall amount. Therefore, before deciding to spend that money, we recommend you determine whether you plan to move in the next five years or not. That way, you can avoid refinancing, especially if you wish to sell the property and go somewhere else.
Besides, you should check out whether you can break even before moving. It is a point when the savings outweigh the expenses you made. A general rule states you should calculate how many months you will need to deal with closing expenses.
For instance, if closing costs are three thousand dollars and your savings are a hundred per month after refinancing. It means you will need twenty-four months to reach break-even and start enjoying lower interest rates.
The length of being in the household is the essential aspect of keeping your mortgage, especially if you consider a cost-benefit analysis. The shorter the time in the house, the lower chances are that you should refinance.
At the same time, if you want to have reached a point of paying off your mortgage, we recommend you avoid refinancing. That way, you will reset and prolong the process, meaning you will stop paying the principal amount and repay the interest rate instead of the new mortgage.
Although it is tempting to take advantage of low rates, you should think about the ramifications of your actions. The main goal is to consider the time you need to break even and closing expenses, which are two essential factors that will help you decide.
What are the Terms of Your Current Mortgage?
An adjustable-rate mortgage goes in both directions because rates can go up or down depending on numerous outside factors. Therefore, choosing a fixed rate may seem like a sensible thing to do.
The best thing about the fixed interest is the ability to plan in the following years, meaning the monthly installments and rate will stay the same over the mortgage’s life. However, some people wish to keep the variable-rate option.
Refinancing by choosing a fixed rate may not provide the savings you want, especially in this environment. According to the Federal Reserve, the benchmark reached zero, meaning it will not increase in the current year. Therefore, the rates are low and will fall as time goes by.
However, if the rates are rising or increasing, the fixed option is an excellent solution because you will prevent additional expenses and increased monthly installments. We recommend you pay attention to potential penalties too.
Check out this guide: https://www.wikihow.com/Prepare-to-Refinance to learn how to prepare for refinancing.
Some loans come with prepayment penalties, meaning you will get restrictions that reduce your financial gain afterward. Therefore, you should get an up-to-date mortgage statement, which will help you identify your current loan.
Do You Have Additional Line of Credit or Mortgage?
Finally, having an additional mortgage or loan can affect your chances of refinancing. As a result, you will not receive as many benefits as you wanted in the first place.
For example, if you wish to close the second mortgage, pay it off or leave it open and combine it with the first one. In both situations, you must handle the procedure, which is why you should discuss your options with a mortgage broker or loan officer beforehand.