Good Credit Refinance - Good, The Bad, And The Ugly
You have achieved a good credit score, fantastic, so shouldn't you start paying less on your existing loans? Well the banks aren't going to simply volunteer to reduce what you pay, instead you have to weight the option of refinancing your credit lines at lower rates. The following guide will walk you through what you must know about refinancing to get the best.
There are definite rules regarding when is a good time to refinance your mortgage. While lowering your monthly payment may seem attractive, it is not always in your best interests to do a refinance. For those with good credit refinance can work out well, but just because you have good credit don't think you are in a good position to do a refi.
You need to consider all the important factors before you make the decision to refinance your home mortgage or you could end up with a big case of buyers remorse.
6 Questions You Must Ask Yourself Before Refinancing
Here are 6 factors to consider before going ahead with a financial move that could jeopardize your good credit refinance options in the future.
- Do you know your reasons for wanting to refinance? What goals do you want to accomplish through the refinance? Do you want to take cash out of the loan to pay for other expenses such as education or to consolidate debt or a re you looking for a way to lower your monthly payments? These two goals are vastly different and the reasons for going ahead or holding off on a refinance can be impacted greatly by your answer to this question.
- What is the difference between your current interest rate and the rate you can expect to get if you refinance your mortgage? Experts agree that you should see an improvement of at least 1% in your interest rate before considering refinancing.
- Are you a good credit refinance candidate and do lenders see you in a positive light? Lenders consider both your credit history and your current debt to income ration before making you an offer or approving your refinance application and both should be in good standing.
- How much is your home currently worth? Many homes have fallen in value over the past 5 years and if that is true for you then there is no point in considering a refinance, no matter what your credit standing or current interest rate.
- Will you be required to pay Private Mortgage Insurance (PMI) if you refinance? This is required when your mortgage loan is for 80% or more of your homes value and can be quite expensive. If you are thinking of taking money out of the refinance and it would require you to add a PMI payment to your loan you may want to reconsider. The extra cost involved with the PMI is likely to wipe out any savings you would see from refinancing.
- Are you using the right lender? Just because you have your current mortgage with company XYZ it doesn't mean you have to use them for a refinance. Shop around to find the company that can offer you the best terms and rates. This is especially true for those with good credit, refinance offers are likely to be quite competitive for you if you fall in this group.
Interest rates in the U.S. have been falling for a long time and one of the key components of a good mortgage is a low interest rate. That is because your monthly payment is a direct reflection of your interest rate. For every $100,000 you borrow on a fixed 30 year mortgage you will pay an additional $15,790.23 over the life of the loan for each additional percentage point.
As you can see, the larger your loan the more it behooves you to lower your interest rate as much as possible.
A good credit refinance can literally save you thousands of dollars a year for the next several decades. Interest rates aren't likely to stay low forever and mortgage rates can't go much lower than they already are so now might be the right time to consider refinancing.
Refinancing an ARM
All the discussion to this point assumed that you have a fixed rate mortgage, but what about those with Adjustable Rate Mortgages (ARM's)? The same advice applies to you as long as you won't have to pay any penalties for paying off your current loan. Most ARM's are set to have a very low rate over the first 3-5 years of the loan with the rate rising once this introductory period is over.
The downside is that many of these loans also have a pre-payment penalty built in to discourage you from paying off the loan after the initial introductory rate expires. If you have an ARM with a pre-payment penalty you will have to carefully consider if refinancing makes sense for you.
As you can see current interest rates are only one piece of the puzzle when deciding whether or not to refinance. Each individual has a different situation and different reasons and goals in mind when considering a refinance.
Chances are, if you have a fixed rate mortgage that is at least 1% over the current rates and you have good credit, refinance could benefit you.