Things to Consider Before Refinancing Your Mortgage

Written by: Peter Tollin

 Refinancing has become common in the modern-day mortgage industry. The low interest mortgage trend has made the homeowners to opt for refinance. However, if you are unclear about whether you should refinance mortgage or not, then, in this article, we will reveal the top things to consider when refinancing mortgage. Read along to discover them:

Debt-to-Income Ratio

In case you have a mortgage, then you might think that it will be hassle-free to get a new mortgage. However, lenders have started considering more credit scores than before. They have started following strict policy for debt-to-income ratio. Various factors can help in qualifying for a loan such as higher income, stable job history, significant saving and more. However, lenders tend to keep monthly payment within 28 percent of gross monthly income. Moreover, the overall debt-to-income must be 36 percent or less. Some lenders can go beyond 43 percent.

Refinance Charges

Refinancing a house can cost about 5 to 3 percent of the loan amount. However, borrowers can come up with different ways to reduce cost or even wrap it in a loan. In case, you hold sufficient equity, then you can roll costs into a new loan. This will increase the principal amount.

Moreover, some lenders offer “no-charges” refinance, meaning that you might pay a slightly higher interest rate to cover the closing charges. You should negotiate and shop around as the lender can pay refinancing fees.

Home Equity

The first and foremost qualification you will require to refinance is equity in a house. However, a good news is that values for home have been raised and share of underwater homeowners has reduced significantly. Some houses have not regained their value, and owners have low equity. Refinancing with reduced or equity is not easy always with traditional lenders. Some government programs can come into handy. You can check if you are eligible for a specific program by visiting a lender and focusing on individual needs. Interestingly, homeowners with 20 percent equity will have more chances of qualifying for a fresh loan.

Maintaining a Good Credit Score

In the recent times, lenders tend to cap their standards for approving loans. Thus, various customers may be surprised that even with decent credit score; they might not qualify for low interest rate.

Having said, lenders prefer credit score of 760 and more to qualify for low interest mortgage. Customers with low credit score might still qualify for a new loan but at higher interest rate. It is suggested that when looking to refinance your mortgage, you should ensure that you have significant home equity of about at least 20 percent to qualify for a loan. Moreover, you should have a credit score of at least 760 along with debt-to-income ratio of about 36 percent or less.

You can check different terms, refinancing costs, interest rates, and if you have to pay PMI. In addition, you should make sure to calculate the break-even point and find out if refinancing will affect your taxation.

Private Insurance

Interestingly, homeowners with less than 20 percent of equity in their home when refinancing will have to pay for Private Mortgage Insurance (PMI). If you happen to pay PMI in your current loan plan, then it should not make a big difference. However, some homeowners whose home values have decreased since purchase date may find out that if they choose to refinance, then they will have to pay PMI. The reduced payment may not be sufficiently low to balance the additional cost of PMI. A lender can calculate if you have to pay PMI and the amount it will add to house payments.

 Rates & Term

Since various borrowers focus on interest rate, it is essential to build goals when looking to refinance. It will help you in determining specific mortgage plan that meets your need in best manner. In case you goal is to achieve the lowest possible monthly payment, then you can look for a loan that offers low interest rate on long term basis. Moreover, if you want to pay lower interest, then you can look for low interest on short-term basis.

People who are looking to pay their loan at earliest should opt for a mortgage on short-term plan with payments that they can afford.

Discover the Break-Even Point

An essential calculation when deciding to refinance is finding out the break-even point. It is a point where costs of refinance are covered by monthly saving. Beyond this point, the monthly savings become yours.

Taxation

A large number of customers tend to rely on their mortgage interest deduction for reduction in their Federal income tax bill. In case you start refinancing and pay less interest, then you will possibly pay reduced tax. Many people view this case as a reason to avoid refinance.

But, it is possible that interest will be high in the initial years, when the interest in monthly payment is higher than the principal. Expanding the size of loan due to taking cash out can affect the interest that you will pay.

Conclusion

Similar to various financial transactions, mortgage refinance is complex by nature and needs you to pay heed to specific factors. We have mentioned the essential considerations when refinancing a mortgage. They will help you in deciding if refinancing is the right solution for you. Feel free to share this article and spread the word.


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