Refinancing a mortgage is a big decision for homeowners. It can potentially lower monthly payments, shorten the loan term, and even save you thousands of dollars in interest over the life of the loan. But it's important to consider all the factors before jumping into refinancing. Here are the most important things a homeowner should think about before refinancing their existing mortgage.

1. Credit Score

Your credit score is a key factor in determining the interest rate you will receive on a refinance. The higher your credit score, the lower your interest rate will be. If your credit score has improved since you got your original mortgage, it might be a good time to refinance. If your credit score has gone down, it's best to hold off on refinancing until you can improve your score.

2. Loan-to-Value (LTV) Ratio

The loan-to-value ratio is the amount of the loan compared to the value of the property. A lower LTV ratio means you have more equity in your home and can potentially qualify for a better interest rate. If your LTV ratio is too high, you may not be able to refinance or may need to pay for private mortgage insurance.  LTV is also a great indicator on if you can get your existing mortgage insurance removed.  Removing mortgage insurance can sometimes save you hundred of dollars per month.

3. Current Interest Rate

If interest rates have dropped since you got your original mortgage, refinancing can help you get a lower interest rate and save you money over the life of the loan. You should compare your current interest rate with current market rates to see if refinancing makes sense for you.  We typically recommend that you do not refinance unless you can lower your interest rate by a minimum of .75.  Some lender will try to convince you even if you are only saving .25 off your rate, because they want to make money. 

4. Loan Term

Refinancing can also give you the opportunity to change the loan term. If you want to pay off your mortgage faster, you can refinance into a shorter-term loan. If you want to lower your monthly payments, you can refinance into a longer-term loan. Consider your financial goals and the trade-off between lower monthly payments and paying more in interest over the life of the loan.

5. Closing Costs

Closing costs can add up quickly when refinancing a mortgage. These costs include loan origination fees, appraisal fees, and title insurance, among others. You should get a good estimate of the closing costs before deciding to refinance. You should also consider if the savings from the lower interest rate will outweigh the closing costs over time.  Take the amount of closing costs and divide by the amount you are saving each month, if you can recoup your closing costs, say in 36 months or less, it might be a good time to refinance, assuming you will be living in that house for more than 36 months.  But if your return on the refinance is more than 36 months, evaluate that to see if it is logical.

6. Home Equity

Refinancing can also give you the opportunity to tap into your home equity. You can either take cash out of your home or take out a home equity loan. This can be a good option if you need money for home improvements, debt consolidation, or other expenses. However, it's important to keep in mind that taking equity out of your home means you will have less equity in the future and will be more at risk if the value of your home decreases.

7. Prepaying Penalty

If you have a pre-payment penalty on your current mortgage, you should consider if it makes sense to refinance. A pre-payment penalty means that you will be charged a fee if you pay off your mortgage before the end of the loan term. If the savings from the lower interest rate will outweigh the pre-payment penalty, it might still make sense to refinance.  1^st Choice Mortgage does not do loans with prepayment penalties, but that does not go for other lenders.

8. Your Financial Goals

Finally, you should consider your financial goals before refinancing. If you plan to stay in your home for a long time, refinancing into a lower interest rate can save you thousands of dollars over the life of the loan. If you plan to sell your home in the near future, it might not make sense to pay the closing costs associated with refinancing.

Refinancing a mortgage can be a great way to save money and achieve your financial goals. However, you should consider all of the factors and options.  Sitting down with a Licensed Mortgage Professional, like 1^st Choice Mortgage is one of the best steps you can do.  We can give you an honest and ethical analysis of your situation and make recommendation that benefit you, not a mortgage companies bottom line.