Getting Started: A Check List if you are Considering Refinancing your Mortgage

With the economy starting to pick up speed, but the oil business slowing down, people here in West Texas need to have a good understanding of their finances. This might include considering refinancing your home. But with so many factors involved, there are no cut and dry solutions. Here’s a list of six things you can pull together to help make the re-fi decision easier for your unique situation:

1. Learn the current value of your home. Because the value of real estate fluctuates, your home’s value could be above or below what you paid for it. Talk to a realtor or do a little online research to see what comparable homes in your neighborhood are selling for these days to know how much equity you have in your house.

2. Find out your current mortgage balance. If you know exactly how much you still owe, you can use this number to get a more accurate sense of what your new payments will be. It’s typically on your monthly statement.

3. Get your credit score. If you are looking to re-fi, a high credit score will yield a lower interest rate. But, check your scores to make sure there are no surprises. This will give you a chance to clear up any issues before a lender looks at it.

4. Know how long you plan on staying in your home. Typically in a re-fi, the closing costs get folded into the new loan. Between that and the increased percentage of your new loan that will be applied to interest, it could take more than a year or two before you are chipping away at your original debt. If you think you are going to be moving in the near future, it may not be the time to add more costs.

5. Consider the rest of your debt. If you have a lot of other debt, like credit cards, car payments or student loans that are at considerably higher rates, you might want to take some cash out to pay these off and fold that debt into your mortgage. The good news here is your creditors will go away. The bad news; you’ll be paying off that debt for the length of your new mortgage. The other thing to consider is how you got all that debt in the first place. If you overspent to run up credit cards, you’ll need to make sure you have disciplined spending habits going forward, or the debt might double: your old debt as part of your mortgage and your new debt from running up the cards again. So, be careful.

6. Look at how your financial situation has changed since you bought the house. If you are in a far better financial situation than when you bought your house, and you intend on staying awhile, you might consider shortening the length of your mortgage. If you can take advantage of a drop in interest rates, you may be able to shorten the length of your loan by a few years without much change to your current monthly payment. So, your short term budget won’t be impacted, but having your house paid off early is like giving your future-self a big fat bonus.

On the other hand, maybe you bought your house when you and your spouse were first married and both working. But, now someone stays home with your children, or you are paying for private school. Or, you have other expenses like an aging parent or starting your own business. In that case, you might want to stretch back out your loan. Getting your payments lower by spreading it out over a few more years could cost you more over the long term - even if rates have gone down - but might be just what you need to make ends meet during these unpredictable times.

7. Know the rates available. There are lots of lenders out there, so rates can vary widely. And, different closing companies’ rates can fluctuate too. When you’re talking about the cost of a home, even a tiny percentage matters.

Clearly, there are a lot of important things to consider when making the decision to refinance your home loan. Putting some thought into your goals and your current situation will make it much easier to determine which course is right for you.