Refinancing is a scary thing for many first-time homeowners. But it doesn’t need to be, and it can save you a ton of money. Basically, when you refinance, you replace your current mortgage with a new one at a lower interest rate. A lower interest rate can save you money and can help you pay off your mortgage faster.
Now, interest rates change depending on market conditions and on your credit score. So, if you bought a house with so-so credit when interest rates were high and now you have an amazing credit score, you’re a great candidate to refinance for a lowered interest rate.
When it comes to deciding to refinance or not, the general rule is that if you can lower your interest rate by 0.75% or more, you should refinance. There are several online calculators that will help you estimate how much your refinance rate could be that are worth checking out.
But be aware that refinancing is not a free process. There are several moving parts—from an appraisal on your home to lender fees to escrow costs—that add up to 2-6% of your new mortgage’s cost. Typically, you can roll these closing costs into your monthly payment if you don’t want to pay out of pocket, but you will have to pay interest on it.
If you’re interested in refinancing, first check your credit score. If it’s great (in the 620-800 range), then you’re good to move ahead. If it needs a little TLC, work on paying down your debt and making payments on time. Your credit is a big factor in getting a good interest rate, so you’ll want to get it as healthy as possible.
Once you’re ready to start the refinance process, talk with your current lender and see what they can do for you. Once you have their offer, meet with a few other lenders to see if they can do any better. As soon as you find the best offer (aka lowest interest rate), lock in the offer and start the refinance so the interest rate doesn’t have a chance to increase. Within 2-3 days, you’ll have a new mortgage and a lower interest rate to boot.
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