A mortgage payment might be your biggest single expense each month, and many people will end up paying almost as much in interest as their home originally cost!
Carl Carlson, CEO of Carlson Financial, has more on what it means to refinance and when you should do it.
He said refinancing simply means taking out a loan to pay off your existing loan. If your current mortgage has a $200,000 balance, you would get a new $200,000 loan, which pays off your old loan, and then you resume making payments to the new lender.
It might make sense to do this if you think you can get better terms with a new loan. Carlson said better terms means a lower interest rate. Maybe you have an improved credit score or are in a stronger financial position now, giving reason for a lender to offer you a better interest rate.
If your house or neighborhood has appreciated a lot, having more equity in the house may also be a reason for a lender to extend better terms.
Other reasons to refinance include wanting a lower monthly payment or you’re looking to cut down on the number of years left on your mortgage, which would likely increase your monthly payment but decrease the amount interest you’ll pay over time and get you out of debt sooner.
For starters, make sure you understand the terms of your current mortgage and decide what you would want to get with a new one, Carlson noted.
Start by contacting the bank or financial institutions you already have relationships with, along with any other lender that interests you, and fill out the paperwork to get pre-approval.
It’s best to do this step in a short period of time so that it doesn’t negatively impact your credit score. When you get the results, use a mortgage calculator to make sure you would actually save money with the new terms.
If it turns out you’d save money, it’s time to apply, Carlson said. If you like what you see, you can apply for the loan and the bank will likely require an appraisal.
Refinancing will come with some up-front costs, so make sure to factor those into your comparison.
For the right terms, it could end up saving you thousands.