Low mortgage interest rates may encourage homeowners to restructure their finances. However, your financial situation should determine whether you refinance.Before applying for a home mortgage, there are nine important considerations.
Know Your Home’s Equity
To refinance your home, you first need to have equity. Some homes are still worth less than they were before, while others have very little equity. Conventional lenders are not always able to finance homes with low or no equity. Some government programs are however available. Visit a lender to discuss your needs and find out if the program you are eligible for. A homeowner with at least 20% equity is more likely to be approved for a loan.
Check Your Credit Score
In recent years, lenders have increased the standards for loan approvals. Some consumers might be shocked to learn that even those with excellent credit scores, they may not be eligible for the lowest interest rate.
Lenders typically require a credit score of at least 760 to be eligible for the lowest interest rates on mortgages. Although borrowers with lower credit scores can still get a loan, the interest rates and fees they pay could be higher.
Know your debt-to-income ratio
You may think that you are able to get a new mortgage loan if you have an existing mortgage loan.
Lenders have become more strict about debt-to-income ratios . Although some factors, such as a stable income and a long history of savings, may help you get a loan, lenders will usually limit your monthly housing payments to 28% of your gross monthly income.The ratio of debt to income should be at least 36%. However, some lenders may allow for a higher rate (up to 43% depending on certain factors). To qualify, you may need to repay some of your debt first before refinancing.
Know your debt-to-income ratio
You may think that you are able to get a mortgage loan if you have one. However, lenders have raised the bar on credit scores and have become more strict about debt-to-income ratios.
Although certain factors, such as a stable income and a long job history, may help you get a loan, lenders will usually limit your monthly housing payments to 28% of your gross monthly income.The ratio of debt to income should be at least 36%. However, some lenders may allow for a higher rate (up to 43% depending on certain factors). To qualify, you may need to repay some of your debt first before refinancing.
Refinancing costs
Refinance a home typically costs between 3% to 6% of the total loan amount. However, borrowers have many options to lower the cost or wrap them into their loan. You can roll the costs into the new loan if you have sufficient equity. This will increase the principal.
Some lenders offer “no-cost” refinances. This usually means you will have to pay a higher interest rate to cover closing costs. Do not forget to shop around and negotiate as some lenders may waive or reduce refinance fees.
Rates vs. the Term
Many borrowers are focused on the interest rate. However, it is important to set your goals for refinancing so you can choose the right mortgage product. A loan with the lowest interest rates for the longest term is best if you are trying to lower your monthly payments.
You will pay less interest over the term of your loan if you choose the lowest interest rate. If borrowers want to repay their loan quickly, they should search for mortgages with the shortest terms that allow them to afford payments.
Refinancing Points
Compare mortgage loan offers and make sure to compare both the interest rates as well as the points. To lower the interest rate, points are often paid. They can be as high as 1% of the loan amount.
Calculate how much you’ll pay in points for each loan. These will be paid at closing or included in the principal of the new loan. In recent years, lenders have increased their criteria for loan approvals. They now require higher credit scores to get the best interest rates and lower debt/income ratios.
Know your break-even point
The break-even point is an important calculation when refinancing. This is the point at which refinance costs are covered by your monthly savings. Your monthly savings will be completely yours after that point.
If your refinance costs $2,000 and you save $100 each month over your old loan, it will take you 20 months to recover your costs. Refinances in this situation may not be a good idea if you plan to sell or move your home within the next two years.
Private Mortgage Insurance
Private mortgage insurance (PMI is required for homeowners with less than 20% equity when refinancing. This will not affect your existing PMI payments.
Some homeowners may find that their homes are worth less than they were when they bought them. If they want to refinance their mortgage they will need to pay PMI the first time.
Refinances may result in lower payments than the cost of PMI. A lender will quickly determine if you will have to pay PMI, and how much it will increase your housing payments.
Know your taxes
Many consumers have used their mortgage interest reduction to lower their federal income tax bill. Your tax deduction could be lower if you refinance and start paying less interest. It’s important to remember that not everyone views that as a reason to stop refinancing.
It is possible, however, that the interest deduction may be higher in the first few years of a loan. This is because the interest portion of your monthly payment is larger than the principal. The amount of interest you pay will be affected by the increased size of your loan due to cash withdrawals or rolling in closing costs.
It is illegal to discriminate in mortgage lending. You can take steps to report discrimination based on your race, religion, gender, marital status or use of public assistance. You can file a report with the U.S. Consumer Financial Protection Bureau. Department of Housing and Urban Development.
If a homeowner is wealthy and wants to refinance an existing large mortgage, they will be allowed to deduct interest up to $1,000,000 in mortgage debt. However, the maximum amount of new mortgage debt that can be deducted is $750,000 for homes purchased after December 15, 2017. These changes mean that it is a good idea to speak with a tax advisor about the tax implications of refinancing.
Conclusion
Mortgage refinancing, like many financial transactions is complicated and homeowners must do their research. For quick answers to your questions, speak with a reputable lender. This will allow you to make an informed decision about refinancing. Do the research discussed above if it seems like a good idea.