When to Refinance a Mortgage with Lower Interest Rates

A mortgage is often the single largest expense in a household budget. When rates are low, many consumers are bombarded with offer after offer from lenders promising to help them refinance their mortgage payment to a new, lower rate. However, is refinancing always a good idea? Honestly, refinancing is not for everyone at every stage of his life. When it comes to refinancing your mortgage, there are five golden rules to live by in order to get to a refinancing “yes.”

#1: Check your credit

Refinance or not, without a credit score of 680 or higher you won’t qualify for that new and improved loan interest rate. In fact, you may not even qualify at all. Before applying for a home refinance, get your credit reports from all three bureaus. You can do this once for free annually by visiting Credit Report.com. If there are any negative items on your credit report such as late payments, collections or judgments, it’s best to clear those items from your credit report before applying for a refinance.

#2: Get square with your mortage company

In addition to checking your credit, you need to make certain that you do not have any late payments with your mortgage company for at least the last 12 months. Late payments can hurt approval ratios and will invariably hurt your interest rate. Check your payment history; the better it is, the better your rate will be on a refinance.

#3: Check the rates

When it comes to refinancing, the single most important thing homeowners should remember is to follow the rule of two-percent. In essence, if the rate you are being offered to refinance is not two-percent lower than your current rate, it isn’t worth the costs associated refinancing.

#4: Build your equity

Refinancing does not make solid financial sense unless a homeowner has at least 10 percent equity in his home. Equity is the difference between what a homeowner owes and a home’s market value, which is determined by an appraisal or a market analysis. The more equity you have in your home, the better idea it is to refinance. Ideally, refinancing when you have built up 20 percent equity is the best bet for savings.

#5: Save your money

Refinancing is similar to a home purchase in the sense that you will need to come to the closing table with money. When you refinance, expect to come to the closing with a minimum of three percent of the refinance amount, depending on the loan product. Since each loan is different, it is best to discuss individual scenarios with a loan officer.