Refinancing can save you thousands of dollars and cut down your mortgage term over time, so it can be well worth looking into. However, timing is important. You’ll want to pay attention to interest rates. Luckily, mortgage rates are low right now, so consumers stand to benefit from refinancing. Here’s how to take advantage of that:
Decide refinancing is right for you
If you’re thinking about refinancing, consider your goals. Are you hoping for a lower interest rate? You want to cut down on your monthly payments? Or maybe you want to switch to a shorter term mortgage and pay down debt faster.
Before you refinance, you also want to check that your credit score has improved since you last applied for a mortgage. It doesn’t have to be your credit score alone, however. If other areas of your financial life, including your debt, savings or income have improved, that can also work in your favor.
If your financial situation is the same or worse than it was since your last application, you might not be able to save any money through refinancing.
How to get started
If you’ve decided this is the right time to refinance, there are ways to set yourself up for the best possible outcome.
Right off the bat, you should check in with your credit. Even if your credit is in better shape than it was when you originally applied for your mortgage, you should still check for problems. These would include too-high levels of revolving debt, outstanding bills or inaccuracies.
Just like with any mortgage application, you’ll have some paperwork to gather. That includes W2s, tax returns for the past couple years, and pay stubs and bank statements for the last 30-60 days.
Your house might need some attention, too. If you’re applying for a new loan, you’ll have to make sure there are no glaring code or safety issues in your home. Things like faulty wiring, a worn-out deck or construction that isn’t up to code could be red flags for any lender considering your application.
Weigh your options
Once your home and finances are prepared, there’s still more homework to do. First you should decide on your loan term. If you need to beef up your savings, it might be a good idea to opt for the 30-year choice to keep your monthly payments low. But if you want to build up equity quicker, a shorter term loan could be right for you.
After that, it’s time to shop around for a lender. You might start by looking at rates. However, it’s even more important to go with someone you feel comfortable working with.
Finally, don’t forget that refinancing comes with costs: Be prepared to cover closing costs and lender fees at closing.
These rules can also apply to your student loans, if you’re in the process of deciding to refinance those as well. Just be aware that refinancing student loans may cause you to forfeit certain benefits, like loan forgiveness and income-driven repayment plans.