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USDA Loan Rates, Lenders, Guidelines and Information

What Happens to Your Earnest Money if Financing Falls Through?

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Most sellers request an earnest money deposit when you sign a purchase contract. The earnest deposit gives the seller reassurance that you won’t keep shopping for another home and ditch the contract you just signed. It gives the buyer financial responsibility and gives the seller a reason to take the home off the market.

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What if you can’t get financing, though? Will you get your earnest money back?

It’s Not Guaranteed

Looking from the outside, you’d think it makes sense. You put money down on a home in earnest of purchasing it. If you can’t secure the financing you thought you could get, you should get your deposit back, right? That’s not how it works, though. Let’s look at it from the seller’s perspective.

If you agree to buy a home for a specified price, the seller counts on that sale. Sellers usually have plans contingent on the sale of the house. If you back out of the sale mid-contract, the seller now starts from the beginning. In the meantime, the seller probably didn’t actively show the home to other potential buyers. The earnest money helps compensate the seller for the lost time and inconvenience of taking the home off the market.

There’s a way to get your money back though and if you have the right attorney, you should be in good shape.

The Financing Contingency Helps You

A financing contingency can help you get your money back if your financing falls through after signing a contract. The financing contingency is a part of the real estate contract. You ask for the stipulation that if you don’t secure mortgage financing within ‘x’ number of days, that you get an earnest money refund. Each financing contingency will have different terms based on the situation.

Keep in mind that seller’s don’t have to accept a financing contingency. Your attorney can help you work out those details. Sometimes sellers only want to allow a certain amount of time for the financing contingency, while others only want buyers that know beyond a reasonable doubt that they have financing.

If you find a willing seller that will accept the financing contingency, though, you must work fast. Before you sign the contract, make sure you choose your lender and have a pre-approval already. The pre-approval should show the loan amount you could borrow, the estimated interest rate, estimated mortgage payment, and the conditions you must satisfy to close on the loan. Make sure you can satisfy the conditions within a reasonable about of time. The faster you work with the lender to satisfy the conditions, the faster you can have solid loan approval and not have to worry about your earnest money.

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You are on a Schedule

Even if you have a financing contingency in place, you only have a short time to back out of the contract. If the financing contingency gives you two weeks to secure financing, act fast. Once you pass that two-week mark, you can’t get an earnest money refund if you don’t get approval for financing.

If you know you won’t secure financing within the allotted time, you must request the return of your earnest money in writing. Read the purchase contract carefully to find out the exact procedure required. Some lawyers request advance notice or certain types of proof that the financing fell through. If you don’t meet the requirements for the refund by the last date of the financing contingency, you risk losing your earnest money deposit.

Keep in mind that the financing contingency itself must be in writing. Don’t accept verbal terms from anyone. If you want a financing contingency, talk to your attorney about working it into the contract. The seller has the right to deny the contingency or the offer altogether, but you can try. If the seller does deny it, you must decide what risks you want to take regarding your earnest money and signing the purchase contract.

You can get your earnest money back if your financing falls through, but only if you take the right precautions. We recommend using an attorney to help you before signing a purchase contract to make sure your rights are protected.

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USDA Loan Home Condition Requirements

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USDA loans provide low to moderate-income families with 100% financing. It’s a great way to buy your first home or a subsequent home after losing a home in foreclosure. Without the need for a large down payment, you can buy a home sooner than you thought.

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The USDA has flexible underwriting guidelines making it easier for you to qualify for the loan. However, one area they are strict is the home condition requirements. Keep reading to learn what a home must have in order to qualify for USDA financing.

The Home Requirements

All USDA homes must have:

  • Year-round street access – In any season, cars should be able to access your home from the street with easy driveway and sidewalk access.
  • Walls in good condition – All walls, both interior and exterior must not have mold, rotting, or holes. They must protect the home adequately.
  • Foundation in good condition – The foundation must not have any cracks, mold growth, or even the presence of moisture.
  • All doors must be in good condition – This includes interior and exterior doors. Each door must be able to open and close properly, as well as lock.
  • Flooring in good condition – All floors must be safe and without hazards; this includes all carpentry, laminate, hardwood, and ceramic floors.
  • All windows in good condition – All windows must open and close properly as well as lock effectively. There should not be any moisture, mold, or mildew growth on the windows.
  • The roof must be in good condition – The roof should have 3 -5 years of life left on it. There also should not be any defects, such as missing shingles or holes in the roof.
  • All stairs must be in good condition – The stairs should not pose a hazard and should have a working handrail.
  • All plumbing systems must be in working order – There should not be any issues with operation or leaks in any plumbing
  • All electrical systems must be in working order – There should not be any safety or operational issues with the electrical systems
  • No pest damage – There should not be any pest, termite, or any other type of infestation or damage

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Who Determines That the Home Meets the Requirements?

The USDA sets the home requirements, but it is the USDA-approved appraiser’s job to make sure the home meets the requirements. The USDA approves certain appraisers to work on their behalf, ensuring that the home meets the USDA requirements.

The appraiser has a lot of jobs when evaluating a home for USDA financing. First, he or she must make sure the home is worth as much as you bid on it. Then the appraiser must make sure the home meets all of the USDA guidelines. Finally, the appraiser must certify that the home is safe, sound, and sanitary. In other words, you must be able to move into the home right away and not be exposed to any hazards.

Further Inspections

If the appraiser finds any issues with the above guidelines, the lender will likely require further inspections to determine if the home is eligible for USDA financing or not. For example, if the appraiser found mold in the basement, the lender may require a mold inspection. This more detailed inspection will let the lender know the depth of the damage and if it is something the seller can rectify or if the lender must cancel the loan.

The USDA Does Not Require an Inspection

Don’t confuse an inspection with what the USDA requires. The USDA requires an appraisal with a checklist showing that it meets the above guidelines. However, paying for an inspection is always a good idea as it helps you know the true condition of the home.

If your purchase contract has an inspection contingency on it, you can use this time to review the inspection report and decide if you want to move forward with the purchase. If the home has major problems, you may want to reconsider or re-negotiate with the seller to have him or her fix the issues before you move into it. This is especially important if you are going to pay for a USDA appraisal. If the issues are those that will interfere with the USDA’s requirements, the lender will put a halt on the loan anyway, until the seller resolves the issues.

The USDA has strict guidelines to ensure that low to moderate-income families do not buy a home that becomes a money pit. The last thing you need is to purchase a home that needs thousands of dollars in work done to it. This puts you, the lender, and the USDA at risk for default, which is what the USDA tries to avoid.

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Things you Should Know About USDA Rural Rental Housing

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If you apply for assisted apartment housing that the USDA finances, you have to follow certain rules. If you violate the rules, you could find yourself without an apartment to rent. Knowing the following factors can help you stay on the ‘up and up’ with the USDA, allowing you to continue renting your USDA rural apartment.

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Tell the Truth

USDA rural rental housing is only for certain demographics. If you don’t tell the truth on your application, you commit fraud. The USDA considers incorrect or omitted information fraud and could leave you:

  • Evicted
  • Required to reimburse the USDA for any rental reimbursement you earned
  • With legal issues and fines

Some of the information you must provide includes:

  • Disclosure of income of all adults living in the apartment including wages, alimony, child support, disability, pension, or income from assets
  • Disclosure of all assets of all adults living with you including bank accounts, investment accounts, real estate assets, or business assets
  • Disclosure of the names of all adults that will live with you

You Must Recertify

Once a year, you must recertify with the USDA to continue to have the right to rent USDA rural housing. Your annual recertification requires:

  • Disclosure of all income changes
  • Disclosure of any changes in household members
  • Disclosure of your current assets

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You Must Report Changes Right Away

If you have a change in your income or the members that live with you, the USDA must know right away. The USDA requires that you report changes in income of $100 or more per month right away. They also require that you report any changes in household members right away.

How Owners Benefit

Property owners of rural rental housing receive funds from the USDA to provide lower rent to their tenants. The USDA pays a part of the rent on behalf of the low income tenants, but you must apply to be a part of the program. You can apply through your local USDA office to receive rent on behalf of tenants to help with your operational expenses.

Rural rental housing helps property owners help low income renters have a place to live. Following the guidelines will ensure that everyone receives their benefits, whether a place to live or supplemental rent. Contact your local USDA office for specific questions about your area.

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Do USDA Loans Require Tax Returns?

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The USDA loan is one of the few loan options that offer 100% financing. You have to be a low to moderate-income family and you must buy a home in a USDA designated rural area in order to qualify. Finding a home in a rural area is pretty easy to figure out, but it’s the USDA income requirements that may make you stumble.

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The USDA income guidelines take into account the income of everyone over the age of 18 in your household. Even if the household members aren’t on the loan, they have to disclose their income. In the past few years, the USDA has gotten a little stricter with this requirement by requiring borrowers to supply their tax returns. It’s not the way you might think, though.

Keep reading to find out how it works.

The IRS Tax Transcript Requirements

You may not have to provide your copy of your tax returns to prove your household income, but the lender does have to request your IRS transcript. This means you and every household member will have to complete IRS Form 4506 T. This form gives the lender permission to access your IRS tax transcript.

The tax return transcript shows the basic information about your tax return so that the lender can verify what you supplied is the truth. It is a summary of what you filed, but it also shows your adjusted gross income. The lender then uses this to verify that you provided the same information.

If the information matches what you told the lender, the lender can then move forward processing your loan. Their first order of business is to make sure that you meet the income guidelines for your area. You cannot make more than the allotted amount for your family size and your area. In general, you can’t make more than 115% of the average income for the area.

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Qualifying Your Income

Once you know that you are eligible for the loan, you then have to prove that you qualify for it. Will you need your tax returns for this step too? It depends on the type of income you earn. Typically, if you are a salaried employee or you work full-time on an hourly salary, you won’t need to provide your tax returns for qualifying purposes.

On the other hand, if you work on commission (more than 25% of your income is commission) or you own your own company, you will need to provide your tax returns. In this case, you’ll likely need to provide the tax returns for the last 2 years. This gives the lender the opportunity to average your income over that time.

Why would a lender need two years of income? It’s because of the volatile nature of both commission income and self-employed income. When you don’t receive a salary, your income likely has ‘ups and downs.’ If the lender were to qualify you on your income when your income was ‘up,’ you might qualify for more mortgage than you can afford year-round. If the lender qualified you for a loan when your income was ‘down,’ they may short change you. Taking that 2-year average helps the lender know that you can afford the payment year round.

Other USDA Loan Requirements

Aside from proving that you can afford the loan, you’ll need to show the lender other factors to ensure that you qualify for the USDA loan program:

  • 640 minimum credit score
  • 29% total housing ratio (your housing payment shouldn’t exceed 29% of your gross monthly income)
  • 41% total debt ratio (your total debts shouldn’t exceed 41% of your gross monthly income)
  • Proof that you will live in the home as your primary residence
  • Proof that you can’t qualify for any other loan program

The USDA loan provides 100% financing, as we discussed above. This means you don’t have to put any money down on the home, but you do have to cover the closing costs. The only way that you can roll the closing costs into your loan is if the house appraises for more than the amount you agreed to pay. If this is the case, you may be able to increase your loan amount to cover the closing costs.

Keep in mind, that you’ll also pay mortgage insurance on the USDA loan. You will pay 1% of your loan amount at the closing (or rolled into your loan) and 0.35% of the outstanding balance each year, paid on a monthly basis. In other words, the lender takes the annual premium and divides it equally amongst your 12 monthly payments. You pay the insurance along with your mortgage payment. This insurance lasts for the life of the loan.

In short, USDA loans do require tax returns, but typically not for qualifying for the loan. It’s more to prove your household’s eligibility for the 100% USDA loan program. The IRS transcripts are typically easy to obtain as long as you provide the proper form. If there is an issue and the lender cannot obtain them, you can request them yourself and provide them to the lender, if they request this of you.

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USDA Loans: The Hardest Requirements You’ll Face

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If you want to buy a rural home and you don’t have a down payment, you may want to explore your option for a USDA loan. Who can go wrong with 100% financing and low closing costs, right?

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It’s important to know that the USDA loans aren’t for everyone. First, you have to prove eligibility and then you have to prove that you qualify. While it sounds like a lot, there are only a few requirements that are hard and they pertain to the eligibility for the program.

What’s a USDA Loan?

You should understand that the USDA loan is only for borrowers that have low to moderate household income. In other words, if you or someone in your household makes a lot more than the average income for the area, the USDA loan isn’t for you. It’s reserved for borrowers that would be unable to secure any other type of financing.

That being said, the toughest USDA loan requirements are the property location and the total household income. You can use the USDA’s charts to determine where you fall within their requirements.

The Property Requirements

In order to use USDA financing, you have to buy a home within the rural limits that the USDA set. Now what they consider rural and what most people consider rural are usually two different things. The USDA uses the most recent census tract to determine which areas are rural.

While it doesn’t mean you will live in the middle of cornfields with no neighbors for miles, it does mean you’ll live outside of the city limits. If that’s not something you want to consider, the USDA loan wouldn’t be the right choice for you.

The Income Requirements

As we discussed above, you need to be within the average income for your area in order to be eligible for the USDA program. This includes all incomes made from everyone in your household. If you have aunts, uncles, grandparents, or friends living with you – each adult income counts.

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The USDA doesn’t provide loans for borrowers that have a household income that exceeds 115% of the income for the area. But, they do allow what they call allowances to make it easier to qualify:

  • If you have children that live with you, they will likely be worth a $480 deduction each. The USDA allows this deduction for each child under the age of 18 as well as each child over the age of 18, but that is a full-time student.
  • If you have disabled relatives living with you, the USDA provides a $480 deduction for each disabled person living in your residence.
  • If you have elderly parents or other relatives with you, the USDA allows a $400 deduction for each elderly person in your residence.

The USDA will look at your monthly income based on the above figures to determine your eligibility income. If you don’t pass this step, you won’t move forward with the USDA loan.

The Qualifying Requirements

Once you get past the eligibility requirements for the USDA loan, the actual qualifying requirements are fairly relaxed:

  • 640 credit score
  • 29% housing ratio
  • 41% total debt ratio
  • Stable income/employment
  • Proof that you will live in the home as your primary residence
  • Proof that you cannot secure any other type of financing

Keep in mind that you can’t apply for the loan with your entire household as co-borrowers. Typically, it’s just you and one other person, such as a spouse, on the loan. The other incomes in the house can help you pay the bills, but they don’t help with qualifying for the loan.

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Understanding the Prepayment Penalty

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While it sounds odd, a prepayment penalty is a charge you must pay if you pay your mortgage off early. The concept used to be commonplace in the mortgage industry, but today very few lenders still use it. Just in case you come across a lender that requires this type of penalty, you should know what it is to help you decide if you want the loan.

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Where do you Find the Prepayment Penalty?

The best way to find out if you have a prepayment penalty is to ask the lender. Do this before you sign the loan documents in case you don’t want the loan any longer. You should also peruse your loan documents carefully. Lenders should disclose the prepayment penalty when they provide you with the Loan Estimate within three business days after applying for the loan. When in doubt, always ask. You don’t want to assume that there isn’t a prepayment penalty; that could be a costly mistake.

Why is There a Prepayment Penalty?

Some lenders use prepayment penalties to help ensure that they make a certain amount of money on your loan. For example, if you take out a 30-year loan, the lender is counting on making interest for those 30 years. If you pay the loan off in say 3 years, the lender will not make nearly what they thought they would when investing in you.

Typically, prepayment penalties are only for the first few years of the mortgage. For example, you may see a prepayment penalty if you pay the loan off in 5 years or less. After that point, lenders don’t charge the penalty because many people sell their homes and pay off their loans after just 5 years. Charging you to pay the loan off early before the 5th year, though, encourages you to keep the loan or pay the penalty.

How Much is the Prepayment Penalty?

Every lender charges a different amount for their penalty. It’s on a loan-by-loan basis. Typically, it’s referenced as a percentage of your loan amount. For example, if you have a $200,000 loan with a 3-year prepayment penalty at 3%, you would have to pay 3% off the current outstanding principal if you pay the loan off before 3 years.

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Let’s just assume your principal balance is $198,000. You would then pay a fee of $5,940 to pay the loan off early. This may not make much sense, especially since you’ll probably owe more than you make on the sale of your home this early in the game.

Know the Details

Not every prepayment penalty means that you are penalized no matter how you pay off the loan. Some lenders grant exceptions for borrowers that sell their home, but not those that refinance. Lenders try to prevent you from refinancing by slapping on the prepayment penalty. It’s a way for the lender to keep your business by not allowing you to refinance without a charge.

Ask about the fine print of the penalty even if you plan to keep the loan, though. Some lenders do allow you to make extra payments towards the principal, up to a certain point. The lender calculates how much they want to make on your loan and then maximize your prepayment penalty accordingly.

The prepayment penalty is few and far between today, but it’s still a question worth asking. In some states, the prepayment penalty is illegal, so you won’t have to worry about it. But, in many states, it’s perfectly fine and many lenders still stick to it to make sure that they make enough money on your loan.

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Does an IRS Payment Plan Affect Your Ability to Buy a Home?

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Do you have a payment plan with the IRS because you couldn’t pay your taxes? You might think that it makes you ineligible to get a mortgage, but that may not be the case. Keep reading to learn how a payment plan may affect your ability to get a loan.

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Fannie Mae Loans Aren’t an Option

We’ll get the bad news out of the way first – you can’t use a Fannie Mae loan if you have an IRS payment plan. They simply don’t allow it. But, if you have good enough credit to get a conventional loan, Freddie Mac loans do allow it, so it’s not a bid deal.

Just because Fannie Mae doesn’t allow it, though, there are many other loan programs including all of the government-backed programs, such as FHA, VA, and USDA loans.

The Important Detail

The most important detail you should focus on is making your payments on time. The loan programs and lenders don’t focus on the fact that you have a payment arrangement. What they focus on is your payment history with the payment arrangement, just as they do for your other bills, such as house payments, credit cards, and personal loans.

What most lenders want to see is on-time payments for the last 12 months. In other words, you have to wait to apply for the mortgage until you’ve made 12 payments and each of those payments must have been made on time. If you have a late payment within that timeframe, you’ll have to start all over again until you have 12 months in a row that you don’t have any late payments.

The Debt Ratio

Aside from the timely payments, you must prove that the debt fits into your debt ratio. Lenders need to make sure that you don’t exceed the debt ratios already set for each program. For example, if you want a conventional loan, you’ll need a debt ratio no higher than 36%. If you apply for an FHA loan, you can have a debt ratio as high as 41% and a VA loan allows a DTI as high as 43% in some cases.

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The lender needs to make sure that you can comfortably afford all of your debts including the new mortgage and the IRS payment arrangement. The debt ratio ensures that you have enough disposable income each month in order to cover the cost of living without having to sacrifice.

Increasing Your Chances of Approval

If you are worried about your chances of approval because of your IRS payment arrangement or your debt ratio, consider coming up with compensating factors. These are factors that offset your risk of default. Some of the most common factors include:

  • A high down payment – The more money you invest in the home, the lower your chances of default become because you don’t want to lose your own investment.
  • A high credit score – If you have a high credit score, it can offset the risk that your tax liability causes. A high credit score shows lenders that you are financially responsible and a low risk of default.
  • A low debt ratio – Just because loan programs have maximum debt ratios, it doesn’t mean that you should max out your debts. The lower your debt ratio is, the lower your risk of default becomes, which makes it easier for you to qualify for the loan.

The IRS payment plan can affect your ability to get a loan only if you don’t pay it on time or if it makes your debt ratio too high. Evaluate your income and debts to see if you can fit a mortgage payment into it while meeting the debt ratios discussed above.

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When Should You Review Your Mortgage?

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Just like you should review your insurance every year, you should review your mortgage annually as well. Your home is one of the largest investments in your lifetime. You want to make sure that you are making the most of your money when you pay it.

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Why should you look at your mortgage? Keep reading to find out the most common reasons.

Your Life Changes

Your mortgage may have made sense for you at the time you took it, but what about now? Has anything in your life changed? Do you have a new job? Is your income different? Is your debt level the same or worse?

These factors will determine what you should do about your mortgage today. For example, if your income fell, you may want to see if you can get a lower interest rate to knock your payment lower. If your debt increased, you may want to get that lower payment just to make your mortgage affordable.

If your goals have changed and you are making more money, you may want to decrease your loan’s term. Maybe you want to own your home free and clear sooner than your current term allows. Refinancing into a shorter term can help you reach your goals.

The Market Changes

The market changes all of the time. Interest rates can change as often as every day or even multiple times a day. You may notice that rates are really dropping one day. That may make you want to go out and refinance your loan.

Before you do, you should make sure that it makes sense. A refinance is going to cost you money. Those closing costs could take away from your savings. Make sure that you will save more in interest by decreasing your loan’s term than it would cost you in closing costs. Typically, it does pay off, but of course, it varies by lender.

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You May Want to Use Your Equity

As you review your mortgage, you may find that you have a large amount of equity. Some people leave it untouched until they retire. They then use that money as a part of their retirement plan. Others see it and want to use it now.

If you have equity in your home, you may want to make home renovations, consolidate debt, or even take a vacation. Some people use it as their child’s college fund and others leave it untouched. Every year, you can see where you stand with equity. Then you can decide what you want to do with it, if anything.

Eliminate PMI

If you pay Private Mortgage Insurance, you definitely want to review your mortgage every year. This way you can see where you stand. Has your home appreciated enough and your principal been paid down enough to get you below that 80% mark?

If so, it’s time to eliminate your PMI. You have to request elimination of the PMI in writing. You’ll also have to pay for a new appraisal, but it will be well worth it if you can save several hundred dollars each month!

Reviewing your mortgage once a year is a great way to stay on top of things. Whether you refinance or not, reviewing your mortgage to see where you stand financially is always a good idea.

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When Can you Eliminate Mortgage Insurance?

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Mortgage insurance is a fee you must pay if you have a government-backed loan (except the VA loan) or if you put less than 20% down on your conventional loan purchase. In some cases, mortgage insurance can add as much as a couple hundred dollars to your mortgage payment.

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Mortgage insurance is strictly coverage for the lender. If you were to default on your loan, the lender would have insurance coverage to get some of the money back that they lost on your defaulted loan.

In some cases, you don’t have to pay mortgage insurance forever. Keep reading to see how you may be able to eliminate it.

Conventional Loans and Mortgage Insurance

If you put less than 20% down and you used conventional financing, you must pay Private MortgageInsurance. The amount you’ll pay depends on your LTV and credit score. You pay this insurance until you owe less than 80% of the home’s value. This can happen in a couple of ways:

  • You pay the principal down according to your amortization schedule and hit 80%
  • Your home appreciates enough that you owe less than 80%

If you want to eliminate the PMI on your loan, you must request it in writing. You must also provide proof of the reason. For example, if your home appreciated, you can supply evidence of the comparable sales in your area.

If you don’t request the elimination of the PMI, by law, your lender must eliminate your Private Mortgage Insurance when you owe 78% or less of the home’s value.

FHA and USDA Loans With Mortgage Insurance

FHA and USDA loans are both government-backed loans. In order to provide the guaranty that they provide, you must pay mortgage insurance. Unlike conventional loans, you cannot cancel the mortgage insurance on the FHA or USDA loan. You will pay the insurance for the life of the loan.

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Also unlike conventional loans, each borrower pays the same amount of mortgage insurance. On FHA loans, borrowers pay 0.85% of their average principal balance each year. The lender then breaks that premium up over 12 months, charging you 1/12th each month. On USDA loans, borrowers pay 0.35% of the average principal balance each year. Like FHA loans, you pay 1/12th of that amount each month.

In addition to the annual mortgage insurance charged, both FHA and USDA loans also charge an upfront mortgage insurance fee. The FHA charges 1.75% as an upfront mortgage insurance fee and the USDA charges 1.0%. Each of these is a percentage of the loan amount and the fee is collected at the closing.

Like we stated above, you pay the insurance for the life of the loan. This means even when you owe less than 80% of the home’s value, you still pay mortgage insurance.

Getting Rid of Mortgage Insurance on FHA or USDA Loans

The only way to eliminate mortgage insurance on FHA or USDA loans is to refinance the loan. You’d have to refinance into a conventional loan with an LTV of 80% or less in order to avoid PMI. Because conventional loans have stricter requirements than FHA or USDA loans, you’ll need to make sure you qualify.

Conventional loans require:

  • 680 credit score
  • 28% housing ratio
  • 36% total debt ratio
  • Stable income/employment
  • No recent bankruptcies or foreclosures

If you took the FHA or USDA loan because you didn’t meet one of these requirements, you’ll have to work to improve your situation so that you do qualify. Once you pay off your USDA or FHA loan, you’ll eliminate the mortgage insurance once and for all.

Paying mortgage insurance doesn’t have to be a bad thing as it does help you get the loan that you need. But after a while, you’ll want to eliminate it from your payment. If you can request elimination with a conventional loan, that is the easiest route, otherwise, you may have to refinance and pay closing costs to get a new loan.

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The Top Reasons Refinancing may not be Worth It

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You hear that you can get a lower interest rate on your loan so you automatically think it’s worth it. Would it surprise you to know that sometimes refinancing isn’t all that it’s cracked up to be?

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Sure, you can save money and sometimes it’s a great thing to do. Other times, though, the process can be more of a headache and cost you more money than it’s worth. So how do you know when refinancing is right for you?

Keep reading to find out more.

It Will Cost you too Much

Before you refinance, find out how much it will cost. Then you need to compare that cost to the savings you’ll earn. For example, let’s say you’ll save $50 a month, but the refinance will cost you $5,000. It will take you 100 months before you actually see that $50 savings because of how much the refinance cost you. Is it worth it?

For the person that plans to live in the home for the long-term, maybe. After 8 years, he can start seeing the $50 savings, but even that’s a stretch. You can’t predict what you’ll be doing in 8 years. You don’t know if you’ll want to stay in the home or if you’ll even be able to stay. It’s best if you can recapture the savings within a matter of a few years. If it takes more than 3-4 years to pay off the costs of the refinance, it may not be worth it.

You Want to Pay Your Loan off Faster

Many people assume that to pay their loan off faster that they have to refinance their loan into a shorter term. That’s not the case, though. In fact, if you do so, you only make your loan more expensive, because again you have to pay the closing costs.

If you want to pay your loan off faster, you can just make extra payments towards your loan. Just make sure your lender applies the extra payments towards the principal. You can do this in a variety of ways – it depends on how much extra money you have. You can:

  • Pay a set amount extra towards the principal each month (such as $100)
  • Pay 1/12th of your mortgage payment in addition to your regular payment (this makes one extra payment each year)
  • Make bi-weekly payments (pay half of your payment every two weeks, which equals 13 payments per year)
  • Make a lump sum payment towards the principal

There aren’t any rules that you have to follow to pay extra towards your principal, so you do what you can afford.

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You Want the Equity

If you know you have equity in your home, you may think it’s a good idea to take it out of your home. Refinancing with a cash-out refinance gives you access to this equity, but should you do it?

The reason you need the money should determine this answer. If it has anything to do with the home itself, it can be a valid reason. For example, do you need a new roof or you want to add a room onto the home? The money you take out of the home will enhance the value of the home, which will provide you with the equity once again quite quickly. If you want the funds to take a vacation, pay off debt, or do anything non-home related, it may not be your best option.

Remember, refinancing costs money, so you are paying to get access to your own money. Wouldn’t it be better to wait until you are ready to sell the home and you can have your funds in hand without paying thousands of dollars to get to it?

Your Credit or Financial Situation Isn’t Good

If your financial situation, including your credit score, has changed since you bought the home, you may get worse terms now than you did then. If you want a lower interest rate, you’ll need great credit, a low debt ratio, and stable employment. If something changed in those areas, you may not be able to get the low rate that you anticipated.

Even if you can refinance, it can be stressful, take a long time, and be expensive. You may be better off keeping the loan you have now and making the best of the situation. If you wanted to refinance to get cash, consider a personal loan or credit card. If you wanted to refinance to lower your interest rate, keep the rate you have and save the money on the closing costs.

Refinancing typically only makes sense when you can recoup the closing costs in a short amount of time. Unless you need the funds to reinvest in your home, then it could be worth it too. Otherwise, you may want to leave well enough alone and not refinance so that you can save the thousands of dollars in closing costs and continue to pay your loan down as scheduled.

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