When done right, a loan refinance can help you save money. Refinancing means taking out a new home loan to replace your current one. Often, people refinance to reduce their interest rate, lower their monthly payments, or tap into their home’s equity. Other homeowners get a loan refinance to replace their adjustable-rate mortgage with a fixed-rate one.
However, note that a refinance is only beneficial in specific circumstances. The best time to consider doing so is usually when your interest can drop lower than the rate of your original loan. Another good opportunity is when your credit score has improved from the last time you applied for a mortgage.
It’s essential to keep these in mind. Otherwise, your loan refinance can put you in debt or increase your total payments. Follow this step-by-step guide to getting a mortgage refinance to make sure you’re taking a calculated, worthwhile risk.
1. Check your credit score and history
Your credit score will influence the terms of your loan. As mentioned, your refinance will likely be more successful if your score is better than the last time you got a loan. The higher your credit score, the better the refinance rates you can get.
You also want to review our credit history. There are various ways to remove negative credit report entries if you want a clean history, which can improve your chances of getting the loan terms you want.
2. Calculate your home equity
You can refinance a conventional loan with as little as 5 percent home equity. But you’ll get better rates and lower fees if your equity is more than 20 percent. The more equity you have on your home, the more you prove to the lender that you’re financially capable of paying back the loan.
To calculate your equity, check your current mortgage balance. Then, estimate the value of your home through online real estate marketplaces or a real estate agent. Your home equity is the difference between the two figures. For example, if your property is worth $300,000 and you have an outstanding balance of $200,000, then your equity is $100,000.
3. Use a mortgage refinance calculator
Next, you need to estimate your new loan amount and interest rate. Use a mortgage refinance calculator to help you compute. The tool will show a refinance break-even point, which will determine the potential cost savings you can get from a new loan.
4. Compare refinance lenders
Shop around for the best refinance rate by getting quotes from multiple lenders. Look for at least three lenders, including an online lender, a bank, and a mortgage banker. Each lender will give you an estimate within three days of receiving your best information. The assessment will list the possible loan term, projected monthly payments, closing costs, and additional fees.
Compare the loan details from each lender to determine which one will benefit you the most.
A mortgage refinance is tricky. Double-check the terms of your original loan and pore over the details of your potential new mortgage to make sure you’re making the best decision for your financial future. Seek advice from a mortgage loan consultant and look for informational resources online to help you.