Home Refinancing: 5 Questions to Ask before You Refinance
Several recent news stories have made it abundantly clear that home refinancing in the UK is not slowing down. In fact, it has picked up considerably over the last 12 months. Perhaps you are one of the millions of UK homeowners who may choose to refinance at some point in the next five years. If so, you are in good company.
Refinancing is a good way to take advantage of lower interest rates and secure a better deal than you have now. It's also a good way to release equity in your home. On the other hand, refinancing generally increases the time it takes to pay off one's home. Therefore, it pays to be sure you know what you're doing.
Here are five important questions to ask if you're considering home refinancing:
1. How much equity do I have?
Equity is the difference between what you currently owe on your home and what it is worth on the open market. The equity question is the first question to ask because the answer will influence nearly every other aspect of the home refinancing equation. To start with, you may not be able to get an acceptable deal if you have a minimal amount of equity to work with.
2. Am I having trouble making my current mortgage payment?
Some people choose to refinance their homes because their current payments are too high. By refinancing at a lower interest rate and extending the amount of time they have to pay, they can achieve lower monthly payments that are easier on the budget.
So, what about you? Are you struggling with the monthly mortgage payments? If so, there may be other ways to regain control of your budget without refinancing. That's not to say home refinancing isn't an option; it is merely to suggest that it's not your only option.
3. Am I planning to sell within the next five years?
Whether you are planning to sell your house in the near future or not influences the wisdom of home refinancing. For example, let's assume you are a younger homeowner with a new family and plans to upgrade within the next few years. Home refinancing now may result in lower monthly payments, but you'll have a larger debt to repay when you sell. You will also have less to work with in terms of a down payment for your new house. If you're not planning to sell within the next 5 to 10 years, home refinancing is irrelevant in this regard.
4. What does my credit score look like?
A consumer's credit score is the single most important influence on the kind of deal he or she can get. Those with the highest scores get the best interest rates and terms, and vice versa. If your credit score doesn't look so good, you may want to hold off on home refinancing until you can improve it a bit.
5. How is my current mortgage structured?
It goes without saying that people with adjustable rate and interest-only mortgages would do well to at least investigate refinancing with a fixed-rate product. On the other hand, people with fixed-rate mortgages may find it difficult to beat what they already have. Anyone considering home refinancing really needs to take a good, hard look at the current structure of their mortgage to make sure refinancing is really in their best interests.
Home refinancing is not always as simple as marketers try to make it sound, but it can be a very good tool when used the right way, for the right reason.
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