In 2020, the economy has shifted due to the COVID-19 pandemic. Now, interest rates of mortgages are lower than ever. As a result, it’s possible to swap higher interest rates for lower rates. So, you may be thinking about refinancing your mortgage. However, this may not be the best financial decision for you.
In this article, you’re going to learn about five questions to ask yourself before refinancing your mortgage.
What Are The Reasons Behind My Refinancing?
Before you start the procedure of refinancing your mortgage, you may want to find the main reason behind this choice. Once you find your goal, it’ll be easier for you to make it happen.
Here are three of the main reasons.
Your interest percentage is much higher than the market’s
If you choose a low-interest rate, you can end up saving up a significant amount of money. So, it makes sense to change your mortgage’s interest. Nevertheless, you want to pay your debts as quickly as possible. Still, if you choose lower rates, you may be spending decades and decades paying it all off.
Another downside of lower rates is the total interest that you pay. For instance, suppose you have a $200,000 mortgage with a 5.5% interest rate for 30 years. If you switch that for 4,5%, you’ll pay around 15% more interest, and you’ll be in debt for an extra ten years.
According to that observation, the best way to approach mortgage interest is by:
- Chasing a 15-year deal so you can be quickly free from your mortgage debt;
- Paying more. If the payments aren’t affordable, try to save money and pay extra every month, remember that the monthly quote is just the minimum you have to pay;
- Doing the math; try to understand what’s the best deal for you and remember that lower rates aren’t always the wisest choice.
You can’t afford to pay your monthly fee
Lowering your monthly payment isn’t a good thing because it may keep you committed to your mortgage for longer and with higher interest. Nonetheless, if you can’t afford to pay your monthly fee, then lowering it might be a solution.
For example, maybe you just started to travel more, and you work part-time at a freelance company, twiftnews, or blog. If you lower your mortgage interest, you may pay less every month, allowing you to use the extra money to travel more.
You want to have a more stable interest rate
Some people have a variable rate that fluctuates with time. This means that it changes with the market. If you are in a similar situation, consider picking a lower rate with a convenient time frame that helps you save money.
Do I Plan On Staying On The Property For A Long Time?
Do you plan on staying on the said property for a long time or not? This is a crucial question because the longer you pay, the more money you put in the mortgage instead of the interest. It may be a tough concept to understand, but the first years of your debt, you’re contributing to your interest instead of actually paying your mortgage. In other words, you pay less interest as you continue paying.
For example, 80% of your first payment goes to interest, while the last payment contributes to less than 1%.
Additionally, if you switch interest rates, you might end up stagnating because your balance won’t change.
So, the best tactic is to choose your property and stay there for decades in a row. Also, don’t refinance every time you get the chance.
Am I Eligible For A Refinance?
Qualifying for a refinance is easier than it was before. However, it would help if you still had a decent credit score, debt-to-income proportion, and LTV to qualify. Most mortgages require specialized mortgage scores, so you might want to look for proxies and even free ones. Try to get a 660 score and above unless you’re looking to apply for an FHA mortgage.
Can I Afford Closing?
If you wish to close a mortgage, you need to pay closing fees. Most of them can be financed through LTV because the costs can amount to thousands of dollars. Still, you may want to avoid this method as it can add to your interest. So, try to pay closing costs right away, if you’re going to save funds.
Do I Know All Of My Options?
Once you figured out the details and strategies of your refinancing, you might start looking for the best mortgages and interest rates. You can try to explore the lenders in your area online, and you can ask family and friends to suggest some agencies. CFPB and MagnifyMoney can help you with finding the lowest score, but it’s up to you to find the best mortgagee.
Before you refinance, ask yourself these questions:
- What are the reasons behind my refinancing?
- Do I plan on staying on the property for a long time?
- Am I eligible for a refinance?
- Can I afford closing?
- Do I know all of my options?