The Do’s and Don’ts of Refi Loans

Dec 28, 2022 | Refinance

From switching to a lower rate to consolidating debt and paying off high-interest credit cards or personal loans, there are many reasons why homeowners choose to move forward with a refi loan. Mortgage refinancing can have its benefits, but it’s also not a decision to be taken lightly. The outcome could have a major impact on your financial situation and even affect your ability to continue making your mortgage payments. 

Before making your decision, it’s important that you gain a solid understanding of your finances and the pros and cons of opting for a refinance. Below, we’ve shared some do’s and don’ts for refi loans. 

 

How Does a Refi Loan Work?

A refi loan is a loan that allows a borrower to replace their existing home loan with a new one. The new loan may have different terms from the previous one, including a different rate, amount, and repayment length. 

When you refinance your home, you don’t actually change your existing mortgage. Instead, you get a new loan, which is used to pay off and replace the old one. You will then move forward with making payments according to the terms and conditions of your new loan.

 

Do’s and Don’ts of Home Refinancing

Here are some things you should and shouldn’t do when considering a refi loan:

 

Do’s:

 

Do consider your whole financial situation.

You should refinance when it makes sense for you financially. If a refinance could save you money or help you build equity, it could be a good idea. But if it doesn’t, then there’s really no point in moving forward. Everyone’s financial situation is different and you’ll want to get a good understanding of yours before you make your decision. 

 

Do calculate your break-even point.

Before you refinance, it’s important to know what your break-even point is. Your break-even point is the point when savings from your refinance become equal to the cost of taking out a new loan. Even if your monthly payment is lower, it may be some time before you recover the money you spend on closing costs.

 

Don’ts:

 

Don’t forget about prepayment penalties.

Make sure you check with your existing lender about prepayment penalties associated with your current loan. You don’t want to be caught off guard.

 

Don’t forget about closing costs.

Just like when you took out a loan for the first time, you’ll have to pay closing costs for the refinance. In general, closing costs average from about 2-5% of the total amount. 

 

Don’t refinance if you’re planning on selling or if it doesn’t make sense.

It rarely makes sense to refinance right before selling. This is because if you sell your home right away, you don’t have time to recoup the money you spent on closing costs. Furthermore, certain loan programs don’t allow you to sell your home right after refinancing and may require you to wait for at least one year. In some situations, refi loans make sense and in others, they don’t.

 

Is a Refi Loan Right for You?

Call today to speak to an expert and learn more about the benefits of refi loans. 

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