One way to reduce your interest rate on your home loan is to refinance your house. You have the opportunity to reduce your monthly payment, and to save money overall on what you repay. The combination of a lower interest rate and a lower monthly payment can mean long-term savings, as well as short-term cash flow improvements.
As you refinance your home, though, it’s important to remember these three things:
1. A Refinance is a New Loan
Remember that a refinance is a new loan. You are getting a new home loan to pay off the old home loan. This means that you need to be prepared for all of the hoop-jumping that comes with getting a mortgage.
You will need good credit to qualify for the best rates. You will have to fill out all of the paperwork again, and that can be tedious and time-consuming. Additionally, you will have to prove your income, and show that you have adequate assets to handle the loan.
This isn’t a matter of asking for a lower interest rate; a refinance is a new loan and you will have to go through everything all over again. Prepare for that, and you will be in better shape.
2. You Might Be Extending Your Loan Term
When you refinance your home, you generally get a 30-year mortgage. This means that you might actually extend your loan term. If you have 18 years left on your original mortgage, and you refinance to a 30-year loan, you are adding 12 more years to the life of your loan. It’s important that you understand this.
Of course, even if you extend your loan out, the interest savings might be enough to offset even the longer amount of time you have the debt. You could get a 15-year mortgage, but you need to be careful; the monthly payment will likely be higher and if you need the improved monthly cash flow, you could end up in trouble.
3. You Might Need Cash to Make It Happen
If you owe more on your home than it is worth, the lender might require you to put cash into it. If you owe $185,000 on your home, but the recent economic difficulties resulted in your home being worth $170,000, you might need to come with cash to complete the refinance. While you might not need to make up the entire $15,000 difference (a lender might be willing to take a chance), you will probably need to pay something to make it happen.
Before you refinance, make sure that it’s the right move for you and your finances.