If you’re looking to save some money, refinancing your home mortgage probably seems like a great option.
By refinancing you can reduce your interest rate, cut down your loan term, or tap into your home’s equity to pay off other debts.
You could save tens of thousands of dollars by refinancing, so what do you have to lose?
As it turns out, a lot more than you’d expect.
Lenders want you to believe that refinancing is an easy way out of debt, and they’ll give attractive offers to reel you in. If you’re not careful, all that money you’re supposed to be saving can turn into even more debt.
So, keep reading as we explain what lenders don’t want you to know about refinancing, and 6 tips you should know before choosing to refinance your home mortgage.
If you’re like most people, your home is the largest investment you’ll ever make. And by refinancing, you can use that investment to your advantage.
When you refinance, you’re essentially taking out a second loan to cover your initial loan. So, the first loan cancels out, leaving you with a single loan.
So, what could you gain from refinancing?
Many homeowners refinance to secure a reduced interest rate. A lower interest rate can mean increased equity in your home, and sometimes a lower monthly payment.
Let’s say you refinance your $300,000 home mortgage from a 4% interest rate to a 3% rate. Your monthly interest rate calculation drops from $1,432 to $1,265—saving you around $60,287 over a 30-year loan term!
That seems like a great deal, right?
Not exactly. Remember that when you refinance you’re starting over with a new loan. And because of interest volume you could end up paying more than you would have if you hadn’t refinanced.
Not to mention, you’ll have to pay lenders the same closing costs associated with your first mortgage.
So, maybe you want to reduce your loan term instead. By reducing the amount of time you’re paying (typically from 30 to 15 years) you’ll usually pay less overall…
If you’re able to afford it.
A shorter loan term typically means higher monthly payments. A few hundred dollars extra might not seem like much, but this increase could put a serious burden on your funds if money is tight.
Equity is the difference between what you owe your lender and what your home is worth.
Think of it as the profit you’ll get when you sell your home.
Whether it’s a medical emergency, home repairs/remodeling, or a pricey mortgage payment, the temptation to use your home’s equity is understandable.
And it is possible to take advantage of your home’s equity successfully.
Still, the danger of tapping into that equity is that you’re essentially paying the lender interest to use your own money.
So, let’s say you bought your home for $250,000 with $50,000 down. A couple of years later, the bank values your home at $400,000.
Of that $200,000, the bank will let you use around 80-85% ($160,000 - 170,000)!
But be careful. Equity loans can quickly become a nightmare. If you’re unable to pay the lender, they can take your home and/or leave you in permanent debt.
Refinancing your home mortgage can feel like being trapped inside a maze.
Making one wrong turn can mean endless headaches and even more debt. And lenders want you to believe this is the only way to refinance your mortgage.
We disagree.
So, here are 6 tips to help you make the right choice on the path to mortgage refinancing…
Refinancing your home mortgage will cost anywhere from 1.5-6% of your principal or the amount you want to borrow. Make sure you’re able to afford this fee before you refinance.
Consider your new interest payment too. Even if your interest rate is lower after refinancing, there are other fees and factors that can drive your payments up.
For more on how your interest rate is calculated, click here.
Remember that closing costs will be involved—these fees will usually amount to 2-3% of your total cost.
Do you know your credit score? Maybe a rough estimate?
Just like your first home loan, refinancing will take your credit score into consideration.
Make sure to check your score through multiple sources—it could vary depending on how your loans/lines of credit were reported.
If your credit score is on the lower end of the scale, try to improve it before attempting to refinance. A better credit score generally means a lower interest rate and even a 0.5% reduction could save you thousands.
When you apply to refinance your home mortgage, lenders will take a close look at your debt to income ratio. DTI is another factor lenders use to work out whether or not your loan is worth the risk.
To calculate your DTI, add up all your debt payments and divide them by your gross income.
You’re looking for a number lower than 43%. If your DTI ratio is any higher, it’s unlikely you’ll be approved for a loan.
If you were unable to pay at least 20% of your first loan in the down payment, lenders will consider you a higher risk. Usually, you’ll be forced to pay Private Mortgage Insurance (PMI).
By refinancing your mortgage, you should be able to get rid of this added cost as long as your new loan is less than 80% of your home’s total value.
When you apply for a new loan, the lender will send an appraiser to make sure your home's value matches your loan principal.
The small details matter. Store any items that might be lying around the outside of your home, mow the lawn, repaint worn surfaces—do what you can to improve your home’s curb appeal.
Inside, make sure your appraiser is aware of any renovations/upgrades to your home. And you’ll want to get the interior of your home as clean as possible.
Appearances are important, and taking these extra steps can add to the value of your home.
Refinancing your mortgage could seem like the right choice for you, but it comes with its share of risks.
We believe you should be able to pay the lender less money and save more, without all the hoops you’ll have to jump through when refinancing.
That’s where UFF’s Money Max Account comes in.
With Money Max, you don’t have to worry about interest rate calculations, closing fees, or refinancing to cut down your loan term. It does the heavy lifting for you. By consolidating your debts and tracking your expenses, the Money Max Account takes
the guesswork out of owning a home.
The best part about it? You won’t even have to think about refinancing your mortgage.
Money Max will go straight to work, calculating the most efficient path to a debt-free
life.
Would you risk taking out another loan or tapping into your home’s equity if you don’t have to?
We didn’t think so. That’s why we created the Money Max Account.
In as little as 7-10 to ten years, you could be enjoying life without paying up to 30 years of mortgage payments or other loan debt.
So, you may not need to take out another mortgage. Try Money Max and avoid refinancing altogether!
To learn more about what the Money Max Account can do for you, visit our homepage or contact an agent for more information.