5 Things You Absolutely Need To Know About Refinancing Your Home

The time has come to refinance your home. Maybe you’re looking for a lower interest rate, or want to pull enough cash out of the equity in your home to buy a boat and never have to take on another payment again. The options are as wide open as what you can think up.

But before you start, there are a few things you should know.

But before you sign on the dotted line, there are a few things you should know about the refinancing process. Here are five of the most important:

1.  Your Credit Score Can Make or Break Your Refinancing Deal. 

As you probably already know, lenders use the FICO credit scoring system to determine how risky it is to lend money on a home. A good credit score has a risk factor of 5%, whereas a bad credit score could have a risk factor of more than 30%.

So what’s a good credit score? It depends on the loan that you’re looking at, but you can usually see if your number is going to fly by running it through myFICO before you even start shopping around for different loans. Lenders will oftentimes pull from all three bureaus when determining whether or not they’ll give you money, so checking your scores from Experian, Equifax and Transunion is a good idea as well.

The scores that lenders commonly check for refinancing loans are: FICO Scores 300-499 = Very High Risk 500-600 = Extremely High Risk

Your interest rate will be higher than those with better credit, and the terms of your loan will also be much less favorable. While you may not qualify or need to put down 20% on a new deal, you can still figure out how much cash you’ll need so you know where to start looking.

2.  Refinancing Can Hurt Your Total Cost of Ownership By $75 Per Day

Although it’s true that taking money out of the equity in your home is oftentimes cheaper than any other kind of loan, it’s not without its disadvantages. When you refinance, you are essentially adding to the total cost of ownership of your home by about $75 per day.

This is due to something called TOC. Whenever you pay points or other fees for closing costs, the idea behind TOC is that these fees will end up costing you more over the life of the loan than if they were included in the interest rate.

With a refinancing, because there are no closing costs involved (other than appraisal and title insurance), the money that would normally be used for these fees has now been rolled into your monthly mortgage payment.

The same goes for any cash out at closing; this money isn’t counted as income against your taxes like an extra payment would be, but it is still going to increase your total cost of ownership.

3.  You May Not Be Able to Deduct Your Mortgage Interest Payments.

One of the benefits of refinancing is the fact that you can oftentimes get a lower interest rate than you’re currently paying. But this only applies if you’re taking out a new loan, not if you’re simply refinancing your old one.

The IRS states that “if you take out a new loan, or if you refinance an existing loan and do not change the terms of the loan, you cannot deduct any interest on the new loan or on the refinanced loan.” So if you’re looking to lower your monthly payment by refinancing into a new 30-year loan, you’re out of luck.

But if you lengthen the terms of your loan, you can still deduct the interest as it’s paid. This is because the IRS only cares about how much interest you’re paying each year, not how long it will take you to pay it off.

4. You May Be Able to Get a Lower Monthly Payment

One of the main reasons people refinance is to get a lower monthly payment. In fact, according to the Consumer Financial Protection Bureau, over 60% of borrowers who refinanced in 2013 did so in order to get a lower rate.

But this isn’t always possible; if you have a low credit score or you’re taking out a cash-out refinance (as opposed to a refinance where you’re keeping the mortgage terms the same), your lender may not be willing to give you a lower rate. It’s also a good idea to keep an eye on current mortgage rates in Ontario so you’re well informed.

On top of that, even if they are, it’s possible that you won’t save much on interest overall. There are so many variables at play when it comes to refinancing your home that it’s really hard to tell what kind of deal you can actually get without running through an amortization schedule.

5. You Might Be Able to Get Rid of PMI

If you have less than 20% equity in your home, then there is a good chance that you’ll be stuck paying Private Mortgage Insurance (PMI). This is because lenders want a kind of assurance that their investment is safe and typically won’t offer a mortgage to anyone who doesn’t have at least 20% equity in their home.

But if you refinance into a new loan, you may be able to get rid of PMI altogether. This is because if the new loan has a value of 80% or less of your home’s current worth, the lender will consider it a “conforming loan.” And since conforming loans don’t require PMI, you’ll be able to save yourself the monthly payment.

Just be aware that there are other fees associated with refinancing that could offset any savings you might get from getting rid of PMI.

To conclude,  refinancing your home is a big decision that should not be taken lightly. But if you do your research and know what to expect, it can be a great way to save money on your monthly payments and improve your overall financial situation.