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The Do's and Don'ts of Mortgage Refinancing

If you own a house and are looking to save money, refinancing may seem like the obvious solution. Refinancing could save you thousands of dollars in interest over the course of your loan or even reduce your monthly payments.

If you own a house and are looking to save money, refinancing may seem like the obvious solution. Refinancing could save you thousands of dollars in interest over the course of your loan or even reduce your monthly payments.

However, it can easily have the opposite effect, making your financial situation trickier. Get it wrong and you could be paying more than you’re comfortable with. 

To help you make the best decision for your refinance, we’ll cover the top dos and don’ts below.

Do: Your research

The golden rule of taking out any kind of finance is to always do your research. With something as large as a mortgage, it’s important to do in-depth research of all the possible lenders, interest rates and mortgage terms on offer. 

By doing your research, you can find the best deals so you’re not paying more than you need to. 

Do: Come prepared

Coming to a lender fully prepared means knowing things like your credit score, your home’s current equity, and your debt-to-income ratio. This will help you get more accurate quotes from lenders so you have a better idea of the type of deals you can get. 

Do: Calculate your break-even point

Refinancing your mortgage doesn’t come cheap. As you are essentially taking out a new mortgage agreement, there will be plenty of fees to pay. 

To ensure you save money, you will need to calculate your break-even point - the amount of time it will take you to recover your refinancing costs. In other words, how long it takes you to benefit from refinancing.  

Do: Check your credit report for errors

Your credit score is so important for getting the best rates. If you want to save money when refinancing, your credit score needs to be as high as possible to get a lower interest rate.

Credit score errors are fairly common, so make sure you check your score. If you discover something that you believe shouldn’t be there, you will need to contact the credit bureau you got the report from. A good idea is to check your score across the main three bureaus - Experian, TransUnion and Equifax to get some consistency and catch all errors. 

Do: Watch out for refinancing scams

If you get approached with offers to consolidate all your loans into a mortgage or to sell your home with the option to buy it back at a later date - ignore them. These are common scams that trick homeowners into giving up their house or their personal information. 

If a deal sounds too good to be true, it probably is. A good rule of thumb is to ignore unsolicited offers like this, do your own research, and approach official lenders yourself. 

Don't: Refinance your home for more than its market value

Sometimes lenders will only grant a refinance loan if it exceeds your market value. The problem here is that they usually charge higher interest rates than standard mortgage lenders. You will most likely get a better deal elsewhere so make sure you shop around. 

Don't: Switch to a shorter-term unless you can keep up with repayments

A common piece of advice you see on personal finance sites is to refinance your mortgage to a shorter term so you can pay it off sooner. This is sound advice for the most part, but it all depends on whether you can keep up with the payments. 

By switching to a shorter-term, you can save money on interest overall, but your monthly repayments will likely be higher. If you struggle to keep up with payments, this is a huge risk to your home.

Don't: Open new lines of credit

When you’re shopping around for refinance rates, it’s vital to avoid taking out new lines of credit. Put a halt on that new loan, credit card, or auto finance you’ve been thinking about. All of this could affect your credit score which will definitely affect the rates that lenders can give you. 

In fact, if you are thinking of refinancing, it’s best to prepare early and spend some time improving your credit score beforehand. The better your credit score, the better rates you’ll get.

 Is refinancing right for me?

Refinancing can be a smart move but it’s not for everyone. Your financial circumstances need to be taken into account before any firm decision is made. 

Another thing to consider is why are you looking to refinance? Do you want to reduce your mortgage term? Reduce monthly repayments? Are you looking to free up equity for other purchases? Evaluate your reasons behind refinancing. If you’re looking to take out equity to pay off debts, it may not be the smartest way to reduce debt. 

If you’re unsure whether you will really save money, it may be best to talk with a mortgage advisor to evaluate your options. 

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