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Things to Consider Before Starting the Refinance Process

 

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Things to Consider Before Starting the Refinance Process

June 22, 2020

Mortgage refinancing is somewhat of a hot topic at this time.  With lower interest rates, the amount of refinancing applications is on the rise and these applications are keeping our mortgage lenders busy.   However, the decision to refinance should not be made lightly.  There are a number to things you should consider before you take the jump to refinance your mortgage.

Check your Credit Score:

Knowing your credit score is important since your score will dictate what interest rate you get with your lender.  Generally speaking, lenders are looking for a score of at least 760.  If your score is lower than 760, chances are you will still qualify for a refinance, however it will likely be at a higher interest rate.  Once the offer comes back to you from the lender, look it over carefully and make sure you will save enough to make the refinance worth it.

Know how much equity you have in your home:

Equity is the percentage of your property that you actually own, versus what portion the bank still owns.  Homeowners want to be sure they have at least 20% equity in their home in order to refinance.  If you do not have at least 20% equity, you might still qualify for a refinance through government programs, but will likely have a harder time trying to refinance with a conventional loan.  Since home prices have risen, more and more homeowners are finding themselves having the option to refinance with the conventional loans.

Determine your debt-to-income ratio:refinance-1

Lenders not only look at your credit scores and bank statements, they also take a look at your debt-to-income ratio.  Most lenders would like to see you have your housing payments come in at 28% or less of your monthly income and overall debt-to-income at 36% or less.  There might be instances where that ratio could be higher if all other facts, such as high equity and a high credit score, come into play.

Understand Private Mortgage Insurance:

Private Mortgage Insurance, or PMI, is assessed when homeowners have less than 20% equity when refinancing.  Whether you are currently paying PMI on your mortgage loan or if it is going to be added to your new mortgage loan, be sure to determine if refinancing with PMI is going to lower your payments enough to move forward.  Your lender will be able to easily calculate your estimated monthly payments, with PMI, for you.

Determine what it will cost you to refinance:

There is no such thing as a free refinance.  If a lender advertises free refinancing options, it typically means that you will pay a slightly higher interest rate than you would otherwise to absorb the cost of refinancing. Homeowners will generally be required to pay between 3% and 5% of the total amount of the loan when refinancing.  If your equity is high enough, you might have the option to roll the refinancing charges into your new loan.

 

Aside from the factors above which highlight the things to be aware of before financing, you should also determine the reason your want to refinance, and if refinancing is a wise option for you.

Are you refinancing to consolidate debt? 

This is a common reason many people think about refinancing.  However, refinancing to consolidate debt can often lead to more debt.  If you are not extremely careful with your finances, you might pay off loans and credit cards, only to run up the balances again, leaving you in a worse financial situation.

Are you refinancing to reduce your payments?

While refinancing might reduce your monthly mortgage payment, you need to be sure that the costs of refinancing and the extension on your loan will still make it worth it, saving you money in the end.

Are you financing to get a lower interest rate?

If so, consider how much longer you have on your loan now versus the term length of the loan after refinancing.  There are instances where you might find your monthly payment is decreased due to a lower interest rate, however you might be paying for a longer period of time, ultimately costing you more.

While there are certainly other factors to consider depending on your personal circumstances, understanding what to look out for and the reasons behind your decision to refinance are key.  Do your homework, shop around and speak to various mortgage lenders before starting the refi process.

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