You are getting a refinanced loan at a lower interest rate – should you grab the deal? Well as it turns out, lower interest rate alone should not be the criteria to switch loans. You need to consider a few other things before making this decision.
1. Are your monthly payments going to be reduced?
You should find out how much money the new loan is going to save you every month. If the savings are significant, then the whole exercise might just be worth the effort. However, you should consider the savings number in light of another important factor – the term of your new loan.
2. Has your home loan term decreased?
If yes, then it is certainly a sweet deal. Even if the loan term remains the same and you still save money every month, you should consider refinancing your loan. But if your loan term has increased, let’s say from a 20 year payback period to 25 years, then you should rethink the deal. This can put you in a tight spot – one, it is certainly going to be burdensome to continue to payback your loan for a longer time; second, on a cumulative basis over the course of your new term, you might just end up paying more to the lender than you would have in your original loan.
3 . How expensive is it going to be to refinance?
There could be some one-time costs associated with refinancing. It may have to do with the closing of your previous loan or starting a new one. The total cost of refinancing should not be so high that it takes you a long time to balance it with your monthly savings.
When you are out shopping for a refinancing option, it is a good idea to talk to at least four to five different lenders, including a large bank like Bank of America or Wells Fargo, and an internet lender like ING Direct.
You should also get a copy of your credit history and find out your credit score. If your credit score is less than 660, you might want to wait until it improves. With a poor score, you may not even qualify for a new loan.
Refinancing can be a great option to lower the monthly burden of your existing home loan, but the option should be exercised carefully to make sure that you get real financial benefits out of it.