As with many homeowners, your mortgage payment is likely your largest expense each month. Reducing your monthly payments could provide you with some financial relief.
Refinancing your home loan may be an option to lower your mortgage payments. However, there are some key considerations to take into account before pursuing this alternative.
How much equity do you have?
The value of your home and how much equity you have are important factors in determining if lenders will help you refinance your loan. According to NerdWallet, banks and other financial institutions are more likely to work with you if have at least 20% equity in your home. In some circumstances, you may be eligible to refinance through government programs with even less equity.
What is your credit score?
Lenders look at your credit score to determine how likely you are to repay a loan. If you have a low score, you could have difficulty finding refinancing or may need to pay a higher interest rate if you do. Before you refinance, you might want to work on building up your credit rating first.
Will you actually save money by refinancing?
The point of refinancing is to save you money, and you should consider whether a new mortgage can do that do for you both in the short and long term. For example, if you want the lowest monthly payment possible, you will likely want to refinance with a 30-year term. This may reduce your monthly expenses, but it can cost you more over the life of the loan.
Weigh your long-term personal finance goals against your current needs. Finding the right balance is essential to ensure you are happy with your decision to refinance.