I’d like to do a quick rundown of the question “to refinance or not to refinance,” which seems to be plaguing everyone right now.
It’s a timely topic for sure. Rates are down and we’d all like to save a buck or two, but when you add in closing costs, how do you know if it’s really worth it?
First, is your FICO score good enough to refinance? Banks are getting tight and you need to have a score over 740 if you want to do this. You can get a credit report for free, through sites like CreditKarma.com, although it won’t be your actual FICO score. Check out this post to figure out where else to get a credit score for free.
photo credit: woodleywonderworks
Second, do you have some home equity? You’ll want at least 20% equity to get the best rates. Check Zillow.com for comparable listings. Remember, you’re calculating not what you paid for your house, but what you could sell it for today.
Third, shop around before you apply. A mortgage application lowers your credit score. You can “rate shop” before you apply to see who is offering what kind of rates. You’ll want to know your FICO score for this, so I hope you’re following these steps in order.
Finally, don’t underestimate a shorter term on your mortgage. Everyone says “thirty year fixed” but if you don’t have a lot of equity, those payments are mostly interest, so why not shorten up the term and save some interest with a 20 or 15 year loan? For our refinance (closing this month) we went from a 30 year term to a 15 year term (rolling in a HELOC of $15,000) and the payment went up just $86. I don’t know about you, but I’ll cancel the cable for that.
*Editor’s note: If you’re looking for more information about refinancing right now, don’t forget to look into the Government’s Making Home Affordable program, it could potentially save you thousands of dollars on your refinance or loan modification!
I would double check this: “www.creditkarma.com has FICO scores for free”. I don’t think those scores are FICO scores. If you want FICO scores try myfico.com and they are not free except for free trials. What creditkarma provides is probably a proprietary score from one of the agencies.
Jessica W says
Lev, you are right, they aren’t FICO scores. They are the TransUnion score, which is usually very similar to the FICO score. Thanks for pointing this out. It was my error.
We had a 30 yr fixed and actually was looking to change to a 15 yr. But then we figured out that we can pay a 30 yr like a 15 yr by paying extra each month. Granted that this would mean the interest rate would be slightly higher, but you can have the freedom of adjusting your mortgage payments if cash is tight.
Money Beagle says
I’d love to be able to re-finance but unfortunately the 20% we put down is no longer enough equity to say we have 20% in the house since the values have fallen.
I agree on the point of re-financing to a shorter term. In my previous mortgage, I re-financed from a 30 year loan to a 15 year loan, and that helped a lot in terms of how much equity I was able to build up over the subsequent few years.
Kelly Rusk says
Great post & thanks for mentioning SmartHippo! I also wanted to make mention of our new SmartHippo Answers… If you have a question about the refi process (or anything about mortgages in general). Like Yahoo! Answers anyone can ask/answer but we also have some experts on hand to jump in when needed.
I’d add a couple thoughts. There are still no point/no closing deals out there. Even to save 1/4%, it may be worth the effort to refinance.
A 15 year mortgage is a great equity builder, no doubt, but only if the rest of your finances are in order. Maxing out the 401(k) matched deposits, having an emergency fund in place, etc. Going with a 15 can be risky if your budget doesn’t have the room for the difference in payments. You can always get the 30 year mortgage but make extra payments to aim for a 15 year payoff.