by Maurie Backman | Updated July 19, 2021 - First published on Sept. 16, 2020
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Thinking of refinancing? Check these items off your list first.
A lot of homeowners are refinancing their mortgages these days, and for good reason. With rates being at historic lows, refinancing a mortgage can result in major savings. Not only might you substantially shrink your monthly payment by refinancing, but you might also spare yourself a boatload of interest over the course of your repayment period.
But refinancing a mortgage isn't something you should rush into. Rather, you should check these important items off your list before applying.
Secure access to The Ascent's free guide that reveals how to get the lowest mortgage rate for your new home purchase or when refinancing. Rates are still at multi-decade lows so take action today to avoid missing out.
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The point of refinancing a mortgage is to snag a better rate than what you're paying already. But if your credit score isn't great, it may not make sense to apply since you'll need good credit to qualify for the most competitive rates out there.
That's why it pays to check your credit score before going through the application process. Check your credit reports as well. If your score is lower than you think it should be, you can review your credit reports to see why that is. A debt could have been mistakenly attached to your credit record, or there could be another mistake working against you. So give those reports a thorough read to see what's up.
During the COVID-19 pandemic, all three major credit bureaus -- Experian, Equifax, and TransUnion -- are offering free weekly credit reports online. Normally, you can only request a free copy once a year, so you now have an easy opportunity to get the information you need.
Mortgage rates can fluctuate from day to day, and while they don't tend to jump too dramatically overnight, you could lock in a better deal if you pay attention to how rates are trending. For example, the average rate for a 30-year refinance could be 3% one day, but 2.96% the next day. For a $200,000 loan, you're talking about paying $50 less a year. That's about $1,400 in interest over the life of your loan. Granted, these aren't huge differences, but you might as well save as much as you can.
Just as you're subject to a home appraisal when you first sign a mortgage, so too will you often need to go through that process when you apply to refinance. A home appraisal is a measure of what your home is worth, and it's something your lender needs to move forward with a new loan. After all, if you're looking to refinance a $200,000 mortgage, but it turns out your home is only worth $190,000, your lender isn't going to want to give you that loan.
The easiest way to get a sense of what your home is worth is to consult a local real estate agent or look online. You can also see what comparable homes in your neighborhood have recently sold for (you can find this information on Zillow or other real estate listing sites).
Refinancing a mortgage could put a lot of money back in your pocket, so it's certainly worth doing. Just make sure the timing is right before you move forward.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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