For many of you, the idea of buying or selling right now is not appealing. However, when I mentioned the low interest rates in an earlier post, that got your mind spinning. How do you know if you should take advantage of the lower rates and refinance your house?
Well there are a few rules of thumb to keep in mind.
1. Choose a reputable lender. Check their fees and costs. This will save you grief and heartache. I suggest also that you get a LOCAL lender. We have seen people burned over and over who find these ”great deals” on the internet that wind up costing thousands of dollars and awful fees and penalties later on. Using a local lender who you have heard is good is advisable.
2. If the interest rate is a full percentage point less than what you currently have, it may be worthwhile. For example, if you are sitting at 6.125, and you can get 5 or below, it will save you lots in a monthly payment.
3. It will cost a few thousand dollars to refi. Most lenders are totally fine rolling the costs into the loan so there is no out of pocket cost. While that is nice, you need to determine how long you are planning to stay in your house and if the cost is worth it. How do you do this? You figure out how much per month you are going to save. Then you divide that number into your costs to see how many months it will take to pay off.
For example, you owe $180,000 and decide to do a simple refi. Your new loan would be for about $182,400. But with your new interest rate you are saving about $150 a month in your payment. So you divide $2400 by 150 and find that it will take you 16 months to recoup the fees in your monthly payment savings. That is the mathematical way to do it. Some people just like saving money and getting that monthly relief, and the math doesn’t matter. They just like the lower interest raten and lower payment each month!
4. Don’t get tempted to pull out ALL of your equity. If you have a reasonable project that would be a good investment to do, such as a kitchen remodel or bathroom, that may be fine. Just make sure to pull out only what you need to do the project and then leave some wiggle room of equity in case you needed to sell tomorrow.
5. Finally, realize that not everyone is getting the super low rates. Lots of people are getting great rates. But these SUPER low rates are for people with equity and good credit scores. It is a combo of those two factors. So how do you work on getting that great credit score?
This report came from MetLife Home Loans, a division of MetLife Bank.
Credit scores range from 350 to 850, with 850 being the best possible credit score you can receive and 350 being the worst. There are five factors that determine your credit score:
YOUR PAYMENT HISTORY: 35% impact on your credit score... pay your bills on time.
THE BALANCE OWED VERSUS YOUR AVAILABLE BALANCE: 30% impact... keep balance at 50% of available.
YOUR CREDIT HISTORY (HOW LONG ACCOUNTS HAVE BEEN OPENED): 15% of your score.
THE TYPE OF CREDIT YOU HAVE: 10% of your score. A variety of credit is best.
THE RECENT INQUIRIES INTO YOUR CREDIT: 10% impact. The less inquiries, the better.
Keep the above factors in mind and use them to improve your existing credit score. Most, if all, loan rates are based heavily on your credit score; be sure to take advantage of the lowest rates by keeping your credit score high.
And for those Dave Ramsey fans out there who just tuned me out for that part, I want you to know that I am happy to work with you on your purchase or sale keeping his principles in mind!
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