The decision to refinance your existing mortgage is clear cut in many financial situations. If you’ve had your mortgage for more than five years, prevailing interest rates could be several points lower than what you’re currently paying. If your financial situation is different from when you purchased your home you may also qualify for better mortgage rates.
Another common reason for mortgage refinancing is to cash-out equity in your home. You can use this money to consolidate your bills, renovate your home, or pay for education. If you’ve decided to go forward with mortgage refinancing, here are several tips to help you avoid refinance mortgage problems.
Mortgage Refinancing – Take Stock of Your Finances
Before refinancing your existing mortgage, make sure you can afford the payments if you are taking cash back. Whenever you borrow against the equity in your home your payment will go up regardless of the interest rate you qualify.
Because mortgage refinancing is simply taking out a new mortgage to pay off the old one, you will be required to pay many of the same expenses you paid when purchasing your home. Your new lender will require you to document your income and will verify your employment. You may be required to pay for an appraisal, title search, survey, credit reports and legal fees. You can reasonably expect to pay as much as 3% of your loan upfront in origination fees and closing costs.
Mortgage Refinancing – Avoid Additional Debt
If you are refinancing your mortgage to payoff bills, it is important to stop spending. Because your mortgage payment after cash-out refinancing will be higher, additional bills could create a financial hardship. If you fall behind on the mortgage you risk losing your home. Continue with the same spending habits that got you in debt and you’ll find that you’ve wasted your home equity.