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The majority of homeowners think about refinancing at the sight of low mortgage interest rates. What they do not know is that a weak mortgage rate is not a reason to take the plunge. Refinancing your home will have a lot of financial implications surrounding it. It will be a great mistake making refinancing decisions without factoring these implications in.
Beyond interest rate, here are 5 things to know before attempting home refinancing.
1. Know Your Home Equity
Little to no home equity closes the door of conventional lenders. Homeowners can, however, benefit from some government mortgage initiatives, which aren’t always available, and even when it does, it is hyper-competitive.
On a general note, a 20% home equity is the minimum requirement to qualify for a loan program. There may be slight variations in home equity requirements from lenders to lenders. To find out if you are qualified for a refinancing program, meet a lender to discuss your needs. The number one thing that qualifies you for a refinancing program is the equity in your home.
2. Know Your Credit Score
Before talking to a lender, it’s better to review your credit history. While a low mortgage rate could be a sign that you can save on refinancing, the interest rate you receive from a lender depends largely on your credit score.
Don’t be surprised that a good credit doesn’t automatically qualify you for a low interest. To save on refinancing your home, you need a great credit score. Consumers with a credit score below 760 aren’t going to get the best deal on loan approval. A credit score of 760 or higher is what lenders want to see. And that’s what qualifies you for the lowest interest rates.
3. Know Your Debt-to-Income Ratio
In recent years, lenders have heightened their standard for loan approval. Not only for credit score. Even with a good credit score and mortgage loan at hand, it is easy to think you will qualify for a new one.
What percentage of gross monthly income goes towards debt payment is now used by lenders as a factor to qualify consumers for a mortgage loan. High debt to income ratio would make refinancing your mortgage difficult. In the United States, lenders usually want to keep the monthly housing payments below 28% max of consumers gross monthly income.
In short, debt to income ratio should be less and under 36%. You may want to clear up some debts before you apply for your home refinance.
4. Know Your Break-even Point
To know if refinancing makes financial sense for you, you need to do the math. You need to calculate your break-even point. A break-even point is a point at which your monthly savings would have covered the cost of refinancing.
For instance, if the cost of refinancing is $5000, and your savings is $200 per month. It will take you 25 months to break even. In this scenario, it makes sense if you are planning to stay in the house longer. But if you plan to move or sell within two years, refinancing is not for you.
5. Finally, Know Your Mortgage Term
Look beyond the interest rate when deciding which mortgage program suits you best. Your refinancing goal will help you agree with the mortgage terms that meet your needs.
If your goal is to pay off your loan as quickly as possible, go for a mortgage product with the shortest term and the payment you can afford. If you want to reduce your monthly payment as much as possible, go for the program with the longest term, and lowest interest rate.
Welcome to Birds and Lilies! I'm Lou: mother, blogger and freelance writer. This is my lifestyle blog, where I talk about motherhood, infertility and IVF, beauty, my love for food and wine, as well as my thoughts about stuff, and our real-life and travel adventures.
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