6 Questions to Ask Before Refinancing Your Home

May 7th 2016

Refinancing a home loan can be a great way to leverage the value of your home and save yourself some big costs. However, in a precarious housing market, it can also land you in deep water financially. Make sure to consider all the factors before agreeing to refinance.

Do You Have Equity?

In most cases, you need at least 20 percent equity in your home before a bank is willing to consider refinancing your mortgage. If you are underwater, meaning you owe more on your mortgage than your home is currently worth, you may still be able to refinance, but you have far fewer choices.

What Is the New Interest Rate?

Get out your calculator to figure out whether the interest rate on your new mortgage is higher or lower than your current rate. If you are considering an adjustable-rate mortgage, ask your lender for the worst-case scenario, in which your interest rate increases by the maximum amount at every opportunity, and see if you can afford the monthly payments under those conditions. Also, find out whether the interest rate you are being offered is locked in. Some lenders promise one rate, but then charge a higher rate by the time the refinancing is complete.

How Long Do You Plan To Stay in the Home?

A refinance typically costs between 3 and 6 percent of the amount of the new mortgage. Calculate whether your monthly savings are going to cover that expense. If you plan to stay in your home until you retire, this is not an issue, but if you think you might move in a few years, the refinance may not be worth it.

How Is Your Credit?

Check your credit score before you even approach a lender about refinancing. To get a good interest rate, you need a good credit score. A score of 720 or higher is what banks want to see. If your credit score is under 620, you may have trouble finding any lender willing to refinance your home.

How Much Is the Refinance Cost?

Do not look at just the interest rate and monthly payment when you refinance. Getting any mortgage involves a lot of fees, and these can add up to many thousands of dollars, even though you do not have the cost of a down payment when doing a refinance. Ask about lender fees, appraisal fees, title fees and any other closing costs.

Should You Consolidate Other Debts?

If you have credit card, student loan or other debts hanging over your head, it can be very tempting to roll them all into your mortgage. If your bank is offering to consolidate your debts, pull out your calculator again to determine if this is a good deal. If you turn short-term debts into part of a 30-year loan, you could easily end up paying far more in interest over time, even if your monthly payments are lower.


While refinancing may sound like a tempting option, especially if you want to pull a little cash out of your home, it is not always the best choice for every homeowner. Compare the refinancing options available to you with the mortgage you currently hold to make the right choice. Taking a minute to ask these questions might save you from making a costly mistake.

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