6 Questions to Ask Yourself Before You Refinance
Refinancing your mortgage can be the smartest financial decision you ever make. It can also be risky. And a time sink and a mental drain. But when you do it right? Hoo boy, can it mean big savings in the long run. So if you’re debating it, we’re giving you six questions to ask yourself before you dive in.
- Do I have the time?
In a very real sense, time is money. It’s also all an incalculable factor when it comes to your family and mental bandwidth. If you’re already overloaded on obligations right now, it’s probably best to wait until you can devote time and energy to this process. If you’re rushing, you’re more likely to make a mistake, lose out on savings, or fall prey to bad terms. Refinancing requires the same amount of attention and care as your mortgage process did. It’s that important.
2. Is this a break-even scenario or one where I come out ahead?
Most people assume that refinancing will put them ahead, otherwise, they wouldn’t do it. But this isn’t always the case. Take it from 2020, and remember that anything can happen. Job loss, family emergency, or otherwise, could render your decision to refinance unprofitable. Only you know your situation. You can’t predict but you can make an educated guess.
3. Can I resist the urge to roll other debt into my mortgage?
Yeah, this seems like a good idea but like anything else that sounds so good, you wonder why everybody else isn’t doing it, it’s because you might not see the hazards. Let’s use an auto loan as an example. Auto loans often have higher rates than mortgage loans (depending on what market conditions were like when each loan was taken out, of course), but they also have fairly short terms. If you take that short-term loan and turn it into a 30-year loan, even at a lower interest rate, you’re likely to end up paying more. You didn’t think the bank was offering to consolidate your debt out of the kindness of its heart, did you? Banks are businesses. They’re in it for the profit, and if they can stretch out a loan for you, they will, because it gives them more of your money over time.
4. How likely is it that I’ll qualify for the rate I want?
The current interest rates for a refinance quoted on major financial websites and the evening news can only give you a general idea of what interest rate you might be able to get. If you don’t qualify for the lowest advertised rates, is it still worthwhile to refinance? Talk to a few lenders to see what kind of rate you can expect, but keep in mind that the unscrupulous ones will quote any rate to get your business. If you trust the person who did your first mortgage, that’s a good place to start.
5. With today’s increased lending scrutiny, can I make the cut?
If you took out your last mortgage before the housing bubble,today’s requirements and documentation expectations may be a shock. Many lenders will want you to have a high credit score and ask you to provide full documentation of your financial situation, such as recent pay stubs, bank account statements, tax returns and more.
6. If I have it pretty good right now, is it worth the risk of getting a bad deal?
If you’re not savvy when it comes to money, contracts, and salespeople (in this case, loan officers), or you just don’t trust yourself to not make a mistake, refinancing might not be in your best interest. And if your loan is already bad, refinancing doesn’t mean much if you end up with another.
If you answered “no” to even one of these questions, we’d encourage you to take time to reassess, get your financial ducks in a row, research, and reach out to trusted experts.