Refinancing your mortgage can be a huge money-saving move. Given how far mortgage rates fell after the end of the housing boom of the mid-2000s, some homeowners have even refinanced multiple times to take advantage of the lower monthly payments and interest savings available.
More recently, though, the mortgage markets have gotten more volatile, and you can't afford to just jump into a new home loan before you take a closer look at where you stand. Making sure you do the following three things before you refinance your mortgage could save you from making a big mistake -- or help you unlock the maximum savings possible if you do end up pulling the trigger.
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1. Check your credit history
Refinancing your mortgage typically involves the same in-depth examination of your finances as getting your initial mortgage loan took. Especially if you're using a different bank for the refinanced mortgage, the credit check your lender runs on you will play a key role in the mortgage rate that you're offered.
Given how important your credit is, mistakes on your credit report can be costly. That's why it's smart to check your credit history first, by getting copies of the information that your lender will look at from the credit reporting agencies that collect your credit data and produce the credit scores on which many lenders rely. If you find errors, take steps to correct them before you apply to refinance your mortgage. That way, your lender will have the right information -- and you'll be more likely to get the rate you deserve.
2. Get your home in shape.
If you're looking at refinancing, then the odds are that you've been in your home for several years. On the plus side, that means that you've earned some equity by paying down your original mortgage. But it can also mean that your home isn't in as nice a shape as it was when you first bought it.
The reason why you need your home to be in good condition before you refinance is that your lender might well require you to get a new appraisal of the home. Especially if a lot of time has gone by, the condition of the home and the state of the local real estate market might have changed dramatically. In many parts of the country, that's not too big a problem, because home prices have been rising quickly. However, you don't want to put yourself in a situation in which you can't refinance because you can't get your new lender to give you a big enough loan to pay off your existing mortgage. By doing some regular maintenance and upkeep, you can make your house look a lot better, and that's likely to get you a more favorable appraisal.
3. Make sure refinancing will actually save you money
It's always important to do the math before you go forward with refinancing your mortgage. Just because rates have gone down doesn't always mean that a refinancing is a smart move. In most refinancing transactions, your monthly payment is less expensive not just because you get a lower rate but also because you restart the clock on the term of your mortgage. For instance, if you're two years into a mortgage and you refinance, then your payment should be lower, because your new mortgage will take two additional years to pay down.
In addition, there are almost always upfront charges to refinance your mortgage. Compare the amount you'll have to spend on closing costs and other expenses to refinance against the amount you'll save on your mortgage. If the savings is so small that it'll take years to earn back your costs, then you should think twice before refinancing. If you can earn back the savings quickly, then the deal makes more sense.
Don't be in a hurry
It can take time to get these things done before you refinance your mortgage. However, if you remain disciplined and don't cut corners, then the result will sometimes be not doing a refinancing that in the end would have been a poor idea in the first place.
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