10 Questions to Ask Before Refinancing Your Mortgage

Refinancing your mortgage could be a good move if you're eager to lower your monthly home loan payments. But is that the right call for you? Ask yourself these questions to find out.

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Mortgage refinance rates can vary from one week to the next -- or even one day to the next. Just because your friend or neighbor snagged a great rate last month doesn't mean now's the best time to lock in a rate yourself. Do some research to see how rates are trending.

If you already have a low interest rate on your mortgage, refinancing may not pay off. Generally, refinancing makes sense when you can knock about 1% off your loan's interest rate. That may not be possible if your existing rate is competitive.

ALSO READ: 10 Ways to Lower Your Mortgage Rate

The higher your credit score, the lower a mortgage rate you're likely to snag when refinancing. If your credit score isn't in the best of shape, it could pay to hold off on refinancing and boost it first, whether by paying off some debt or correcting errors on your credit report.

If your home value has dropped recently, refinancing could be a challenge. Thankfully, most properties have gained value in today's real estate market, not lost it. But it still pays to do some digging to see what your home is worth. Specifically, you'll want to make sure it's worth at least enough to cover your remaining mortgage balance.

ALSO READ: 4 Ways to Make the Best ROI on Your Home Sale

When you refinance, you're charged closing costs to finalize the loan, and those fees could easily amount to 2% to 5% of your mortgage balance. You'll need to make sure you intend to stay in your home long enough to recoup those fees and come out ahead. Generally, refinancing won't make sense if you think you might move within a year.

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You don't have to refinance to the same loan term you currently have. If you can swing a higher monthly payment, swapping a 30-year loan for a 15-year loan could make sense. That could save you a lot of money on interest and help you pay off your home sooner.

If you have a lot of expensive debt to get rid of and you're sitting on a lot of home equity, a cash-out refinance could make sense. A cash-out refinance allows you to borrow more than your remaining mortgage balance. From there, you can use your extra cash for any purpose, like paying off a nagging credit card balance.

If you're hoping to renovate but need to finance it, a cash-out refinance could be beneficial. Chances are, you'll snag a lower interest rate on a cash-out refinance than you will on a renovation loan.

ALSO READ: Renovating Your Home? Don't Make This Mistake

Home repairs can pop up when we least expect them. If you've been delaying yours due to absent funds, a cash-out refinance could be your solution. It's a relatively affordable way to borrow, given the way mortgage rates have been trending.

When it comes to refinancing, different lenders have different deals to offer. So, it definitely pays to shop around rather than accept the first offer you're given. Reach out to at least three or four lenders, and when assessing your offers, be sure to look at rates as well as closing costs.

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Refinancing your mortgage could result in a lot of savings or give you access to the cash you need to meet a different objective. Run through these questions first to make sure refinancing is the right choice for you and that you end up with a good deal if you do decide to get a new mortgage.

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