Knowing what to expect and understanding all of the costs associated with a loan can help ensure a successful refinancing process. Here are four key questions to ask before refinancing your existing mortgage.
1. What is my goal?
The most important question to consider when refinancing your mortgage is why you are doing it. Are you looking to lower your monthly payments or reduce the total balance of your loan? Maybe you are hoping to tap into your home’s equity to make improvements to the property. Knowing your goal before beginning the process of refinancing will help you structure the loan in a way that best meets your needs.
2. What type of loan makes the most sense for me?
Next, consider the type of loan that is best for your individual circumstances. Different loan structures come with different benefits and rates. Depending on your financial situation and goals, you may want an adjustable rate mortgage (ARM) with a lower initial rate but periodic adjustments, a fixed-rate mortgage with the same rate for the life of the loan, or a government-backed loan like an FHA, VA, or USDA loan.
3. How much will it cost to refinance?
It’s important to understand the costs associated with a refinanced loan. Generally, you will be charged origination fees, appraisal fees, title fees, and closing costs. You may be able to roll some of these fees into your loan, though that will increase the loan balance and alter your monthly payments. Ask your lender if there are any special discounts or ways to lower the cost of the loan.
4. What are the risks?
Before jumping into a new loan, it’s a good idea to research and understand the risks associated with refinancing. For example, if you are looking at an ARM, you may be taking on more risk associated with changes in the interest rate. Also, if you take out a loan that has a longer term than your existing loan, you may extend the timeline of your debt.
In conclusion, refinancing a mortgage can be a great way to save money, but it should not be done lightly. Asking yourself the four questions outlined above can help ensure that you are making the right decision for you and your family. Take time to shop around for the best loan and speak with a lender who can help you through the entire process.
This article was contributed on Aug 08, 2023