Refinancing? 6 Steps for Your Best ResultsTaking advantage of lower interest rates
In the last two years, millions of homeowners have taken advantage of low interest rates, refinanced their homes and saved tons of money. When my wife and I refinanced a little over a year ago we cut our mortgage payment more than $200 per month.
Nationwide, almost half of all mortgages are now about a year old. However, if you’re like me, you may be wondering if the recent drop in interest rates means you should refinance again. Others of you might be interested in refinancing so you can take some of your equity to pay debt, send your child to college, or add on to the house. And, some refinanced in the last couple of years, but their rate was higher because of credit issues. If your credit score is now higher you might qualify for a better interest rate and a lower payment. So, if you are wondering if you should refinance now or even refinance again, the following six steps will help you decide.
Realize there are no hard and fast rules. Over the years conventional wisdom said people should take out thirty-year mortgages and refinance only if their interest rate dropped by at least two points. That advice is not necessarily valid. For example, if you plan to live in your current home for several more years, even a one point reduction could serve you well. Your individual situation, financial needs, income, and goals are the key factors, not some worn out “rule of thumb.”
“Be very wary of sales people that start by quoting interest rates. They’re not trying to understand each person’s individual situation.”
Find a mortgage broker who really listens to you. Russell Ammons, a loan officer who was one of my sources for this article, told me, “Be very wary of sales people that start by quoting interest rates. They’re not trying to understand each person’s individual situation.” For example, you should also factor in the time you expect to own your house, your credit score, your cash flow, and how soon you want to pay the mortgage off completely. A good broker will take the time to talk to you about your situation, listen carefully, and then describe options that help you make your best decision – even if it means not to refinance.
"Be very wary of sales people that start by quoting interest rates. They're not trying to understand each person's individual situation."
Get a written statement of all the fees and costs before you agree to anything. Add up the total cost to refinance and divide by the total dollars you will save each month. This number will tell you how many months you need to live in your house in order to really save money. Be certain the cost to refinance is less than the total amount you will spend in that same period of time if you do not refinance.
Check your credit score. If your score is around 675 (close to the national average), you may want to wait and work hard on raising your score (see the previous Legacy article on credit scoring). A higher score could easily save you hundreds of dollars each month.
Evaluate your spending habits. If the main reason you want to refinance is so you can use home equity to pay off higher interest credit card debt, you may be making a very dangerous decision. Make sure you don't have a spending probelm before you take this step. IF you get behind on paying for your house the way you get behind in paying for your credit card purchases, you could end up in foreclosure or bankruptcy.
Minimize your closing costs. Check every charged line item in the loan documents you receive before signing anything. Ask if each one is essential and if it can be reduced. Also ask if you qualify for a discount on your title policy. If you refinanced within the last few years, you could save several hundred dollars in fees on this one item alone.
Remember, this industry has become very competitive and you should compare from several offers. Buying a home is the biggest financial decision most of us will ever make. It’s also a huge stewardship decision since the right decision can save you hundreds of dollars each month.
An extract from 2=1's Legacy Magazine
Dr. Kregg Hood, preaches, teaches and consults with churches around the country in the area of stewardship, financial ministry and helping people understand God's powerful principles for managing money. He has authored three books, including his latest, Escape the Debt Trap. Dr Hood is also a frequent contributor to a wide variety of Christian newspapers, magazines, radio, and television programs. He and his family live near the Dallas/Fort Worth Metroplex.
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