4 Things to Consider Before You Refinance

Do you struggle to make your monthly mortgage payments? Are you ready for a lower interest rate or shorter term for your mortgage? Refinancing can be a great way to help save you money, but it’s important to consider the costs and benefits of refinancing before you make such a large decision.

1. Your Goals

The first step in the refinancing process is determining what you want to accomplish. Refinancing a mortgage does not erase your debt, but rather restructures it. You are swapping out one set of mortgage terms for another. If you aim to reduce the amount of interest you are paying or need to extend the length of the loan to reduce monthly payments, this might be the right solution for you.

2. When It’s Worth It

Next you need to see if your timing and circumstances are right for refinancing. If your credit score has improved since you applied for your original mortgage, interest rates have gone down, or your income has changed, you exhibit clear signs you might be ready for a refinance. (You can check your credit scores for free on Credit.com.) You must also consider how long you plan to stay in the house. When you refinance, you will pay closing costs and fees so it typically makes sense only if you plan to stay for a while.

3. Types of Refinancing

The two major types of refinancing are cash-out and standard. Cash-out refinancing is the process of taking out a new mortgage for a higher amount than the amount of the previous mortgage. The difference is then taken out in cash. This can result in a slightly higher interest rate because the lender has more money at risk. This might be right for you if you need to pay down other high-interest debt (like personal loans or credit cards) immediately. Standard refinancing replaces your existing mortgage with a new, lower-rate option and there is usually no cash taken out.

4. Costs

As mentioned earlier, refinancing has some costs. Just as with your original mortgage, refinancing requires you to pay closing costs. This includes the application fee, appraisal fee, origination fee and maybe even a prepayment penalty, title search fee, inspection fee, attorney and lender fees. It is important to calculate if your long-term savings with lower monthly payments will outweigh the immediate costs of refinancing.