Refinancing can be a great way to lower your monthly payments and take advantage of lower interest rates. It is also a way to pay off high interest loans like credit cards or short-term loans. There are a number of factors that can affect your refinance decision.
Before you shop for a loan an important consideration is how long you intend to stay in your home. If you know that you’ll be moving within a few years, you can save some money with a balloon or adjustable interest rate loan. Rates for these types of loans tend to be lower because you are assuming some risk that interest rates will rise. Most of these types of loans have caps on the amount the rate can rise in a given year and an absolute cap on the highest rate possible. If you know that your loan will be short-term you can take advantage of these lower rates.
However, if you know that you want to stay in your current residence for over 15 years, it makes sense to look at fixed rate loans. Interest rates are notoriously difficult to predict but because rates have been at historically lows, it makes sense that in the long term they will go higher. Paying a slightly higher rate now might save you money in the long run.
Another factor you might consider
is your overall credit score. If your credit rating is very good, you can be eligible for lower interest loans. Your credit score is determined by some surprising criteria. In addition to the things you might expect, like income, past payment history and total debt, but your credit score also takes into account your level of education, how long you’ve worked at your job and how recently you’ve moved. If you have a bad credit score you might consider repairing your credit history before you apply for a new loan.
When you shop around for your refinance loan be sure to count all the costs before you decide on a lender. The annual percentage rate (APR) doesn’t include costs such as closing costs and other fees such as attorney fees, filing fees, title search, taxes and insurance.
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