Don’t Just Churn Your Finances
Once you have closed on your mortgage, collected the keys and settled into your new home, you might start thinking about how you can get a better deal. Maybe your payments are high, compared to the market rate, or you want to change the term over which you repay the principal from thirty to fifteen years.
If you have equity that you put into the home, you can probably refinance almost immediately. But then you could be piling on the expenses unnecessarily, and it will hit your credit rating right at your weakest point.
So, you may not be able to get the best terms until your equity has grown by more than the costs of a new loan, and your credit score has bounced back from the initial hard credit check and closing on your home loan in the first place.
Do You Have The Collateral?
If housing market values increase, you will gain along with everyone else. One time when you might consider it is when it is more advantageous to refinance than to cancel your FHA or private mortgage insurance. You can eliminate mortgage insurance when you have at least the mandatory equity stake of twenty percent.
Do you risk the cost of an appraisal to find out if your equity is going up? If it is not immediately apparent from discussions with your realtor or authoritative real estate websites that post price estimates, you probably should not.
An Expensive Mistake On The Borderline
If a refinance looks great on paper and you can lock in a favorable rate but then the appraisal is lower than you expected then it was all for naught. With application fees included, you could pay more than $800 before you get a definitive answer on the value of your home.
Your equity depends on the deposit you put down, the payments of principal you have made since then and the conditions of your local real estate market and the upgrades to the property.
If you do refinance you are starting again with the loan, so your term extends, you have to cover repaying your previous financing which may include a significant portion of mortgage costs.
The mortgage discount points that you prepaid on your initial loan will evaporate; you are starting again and will have to pay to get another discount on your rate. Unless of course, you either chose zero or negative points, in which case you might get a better deal. You will pay the costs of closing all over again and perhaps have more costs tacked on to your loan.
Not All Doom And Gloom
You may be in the privileged position of first, having increased equity sufficiently. Second, confidently estimate that you can reduce the cost of finance over the full term by refinancing.
Given these two factors, you are in the position to take action and improve your financial situation as a homeowner. If you can make a re-fi work in your favor, it means you have some equity now, and you can leverage it to increase your wealth down the road.