Should I Refinance My Mortgage?

Key Topics In This Article: Establish The Goal | Review Your Current Mortgage | Pros And Cons List | Making The Decision

One of the most common questions I receive from homeowners is this: should I refinance my mortgage? Only you, the homeowner, can make that decision; however, my short step-by-step guide can help you answer this important question.

There are only three steps needed to help you decide if you should refinance;

  • Establish the goal of refinancing
  • Review your current mortgage
  • Make a pros and cons list

Working through each step will help determine if you should refinance your current mortgage.

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Establish the goal of refinancing

The first thing you should do to help you decide if you should refinance your current mortgage is to establish the goal of refinancing. Some goals include;

  • A lower interest rate
  • Shorter loan term
  • Cash out to renovate the home
  • Cash out to pay off other debt
  • Getting rid of PMI or MI
  • Switching from an adjustable rate to a fixed rate

Establishing the goal of refinancing is an essential first step in deciding if you should refinance.

Review Your Current Mortgage

The next step is to review your current mortgage, so you know exactly what you currently have.

  • Check to see if you have a pre-payment penalty
  • Confirm your current mortgage rate
  • Review your previous transaction

Check to see if you have a pre-payment penalty

Since 2008, most mortgage lenders have moved away from including a pre-payment penalty in their loans. However, some mortgage loan programs still have a pre-payment penalty, so you’ll want to see if that applies to your current loan.

If you have a Fannie Mae, Freddie Mac, FHA, or VA home loan, you probably don’t have a pre-payment penalty, especially if you’ve obtained the loan within the last 5-10 years.

Once you’ve verified you don’t have a pre-payment penalty, you can move forward with determining if a refinance is suitable for your short and long-term financial goals.

Confirm your current mortgage rate

No matter what rate you think you have, always be sure to verify that before you start the process of refinancing your current mortgage. It’s important to confirm your current mortgage rate so that you know you are making the right financial decision with respect to refinancing your existing mortgage.

Review your previous transaction

Reviewing your previous transaction will give you the information you need about your current mortgage to make an informed decision on whether you should refinance. Review the loan fees, costs, and points you paid and any credits you received from the lender (or seller if you purchased a home).

Do you qualify for a refinance?

A homeowner can’t know for sure if they qualify for a refinance before talking to a loan officer, but if you meet the following requirements, you’ll most likely qualify.

  • Do you have a stable job, or have you owned a business for the last two years?
  • Can you document your income?
  • Is your credit score above 620?
  • Do you have equity in the home?

If you answered yes to most or all of these questions, you have a great chance of qualifying for a refinance.

Make a pros and cons list

So you have a goal and all this information, now what do you do? You make a pros and cons list. This is the final step in helping you decide if you should refinance your mortgage.

Pull out a sheet of paper (or use an electronic device like a computer, tablet, or cell phone ) and make a pros and cons list. At the top, put “refinance my mortgage,” and then underneath, your established refinance goal. Next, have a “pro” column and a “con” column.

After you list some pros and cons, put down some important questions like;

  • Am I saving enough money per month to justify a refinance of my mortgage?
  • If you are doing a cash-out loan to improve your home, will the home improvements increase the value of my home enough to justify the refinance of my current mortgage?
  • After I refinance my mortgage, can I afford the new mortgage payment?
  • Do I want to go through the process to refinance my mortgage?

Even if the new mortgage has a lower rate, your payment might go up if you go to a shorter term and/or obtain additional cash out. Once you’ve decided it’s at least worth looking into, obtain quotes from reputable mortgage lenders. Only work with mortgage companies with a top rating with the Better Business Bureau.

Making The Decision

Should you refinance your mortgage? That depends on your goals, your current situation, and the refinance options you have. That’s where you’ll find your answer.

If you follow the three steps above, you can decide on your own. Review your goal, review your current situation, analyze the pros and cons, and then answer the important questions you came up with. By doing this, you’ll be able to decide if you should refinance your mortgage.

Quick pro-tip before you refinance

If you are about to refinance your current mortgage or are in the process of refinancing, don’t let anyone check your credit. Just wait until the refinance process is over.

If you let someone check your credit, you’ll have to document in writing who did it and why it was done. And if you took on new debt, then you’ll have to document the terms under which you obtained the new debt.

Lastly, your new monthly payment will be factored into your overall debt-to-income ratio, which might change your loan application from “approved” to “not approved.” If you are thinking of letting someone check your credit during the refinance process, talk to your loan officer first.

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The bottom line on whether you should refinance your mortgage

Should I refinance is the most common question homeowners ask when mortgage rates move lower or ideas of a remodel start being discussed. It’s important to make an informed decision on whether you should refinance, and using my three-step guide will help you make that decision. Establish your goal, evaluate your current situation, and make a pros and cons list to learn if refinancing makes sense quickly.

Loan Officer Kevin O'Connor

About The Author

Loan Officer Kevin O'Connor has over 17 years of experience as a Mortgage Loan Originator and is a trusted resource for mortgage education and information. He's licensed by the state of California and the Nationwide Mortgage Licensing System. He has a top rating with the Better Business Bureau, Google, Yelp, and Zillow. You can contact him at 1-800-550-5538. CA DRE #01499872 / NMLS #247447