How do you know when refinancing your mortgage is a good idea? In general, it can be beneficial to refinance your mortgage when interest rates drop a few percentage points below the interest rate on your current mortgage. You may be able to lower your monthly mortgage payment as well as the interest rate. You may also be able to switch from an adjustable rate to a fixed rate mortgage which offers more certainty and stability. Refinancing your mortgage has the potential of saving you thousands of dollars on your mortgage. It is definitely worthwhile to explore the possibility during times when interest rates are down.
If you are thinking about refinancing your mortgage the first thing you need to check is to see if there is a prepayment penalty on your mortgage. If there is a prepayment penalty, the cost may outweigh the interest savings on a refinance.
You also need to review your situation and realistically assess your chances of being approved for refinancing. You need to have equity built up and you must have fairly decent credit in order for refinancing to be beneficial for you. Credit has tightened in recent years and refinancing loans are not as widely available as they once were.
There are some things you can do to help improve your credit before you apply for a refinancing loan. The most important thing to do is pay all of your bills on time. You may also want to consider closing any unused credit card accounts you may have. Do whatever you can to improve your credit rating as it plays a significant role in the interest rate you will be offered on a mortgage refinance loan.
Next you will want to compare several refinance loans to compare the rates and terms. If you apply for a pre-approval be sure that lenders are not pulling your credit. If you have too many inquires on your credit report it can lower your credit score. The closing costs and interest rate are the two major things you want to compare with the various mortgage refinance loans.
You will also need to check to see what fees will be added to the closing costs. Lenders are required by law to disclose all fees that will be included within 3 days of receiving your mortgage application. You need to take closing costs and any other fees into account when you are comparing various refinance loans. One thing you can do is ask for a good faith estimate in writing that will detail all the closing costs and the interest rate on the loan you are interested in.