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.
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!