There are different reasons why you may want to choose to refinance your mortgage. Some homeowners do this to help them pay off the debt in a more affordable manner. Others want to change the length of time left on their mortgage payment. And still, others are looking to get a better interest rate on the home as well.
No matter the reason that you are choosing to refinance your home, you will need to be prepared ahead of time. There is some risk to refinancing your home and it does take a bit of time to get all of the work done. Some of the things you need to know before you decide to refinance your mortgage include:
Know the Equity in Your Home
One of the first things that you need to know before you decide to refinance your mortgage is the equity that you have in your home. If your house is now worth less than it was when you started the mortgage, an issue known as negative equity, then it will not make a lot of sense for you to do a refinance on the current mortgage at all.
Typically though, the real estate market will go up in value. There are times when the value may dip down temporarily, but if you stay in your home long enough, this will rectify itself and you will be able to see positive equity in your home. Add to that the fact that you are paying down some of the principal in your payment each month, and you can build up that equity with time.
Before you refinance though, you need to have some equity in the home, especially if you plan to take a loan out that is more than the original mortgage in the hopes of paying down debt or doing some home improvements. You can talk with the lender to see how much equity they think you have in your home. Most of the time you must complete an appraisal to find out.
Know Your Credit Score
Most lenders have tightened some of their standards when it comes to loan approvals in the past few years. Some homeowners may be surprised how their good credit is not going to always mean they are able to get the lowest interest rates possible. The higher the credit score though, the easier it is to get the lender to take a look at you.
In most cases, the lender is going to look for a credit score that is at least 760, if not higher, in order to get some of the deals that you want on those mortgage rates. Borrowers who have a score lower than that may be able to get a new loan, but they should be prepared for higher interest rates, even with a refinance, based on that credit score.
There are different things that you can do to help raise your credit score before you decide to refinance the home. Pay off some of your debts, make sure that you have a higher credit limit, do not shop around too much for a new mortgage provider, make sure that all of your payments are on time, and check your credit report to see if there are any mistakes on it first.
Know Your Personal Debt to Income Ratio
Another thing that you need to know before you choose to do a refinance is your debt-to-income ratio. The mortgage company will still want to make sure that you can afford the new loan, regardless of how long you have been in your current home. The lower the debt-to-income ratio, the better off you will be for getting the refinance.
Many homeowners assume that since they already have a mortgage loan, they shouldn’t have many hoops to jump through when it comes to refinancing. However, most lenders have increased the credit score that they want for these loans and they are strict with the debt-to-income ratios.
While there are some factors, like having substantial savings, a stable job history, and a high income, that can help out here, many lenders are going to want to make sure that your monthly housing payments will never go above 28% of your gross monthly income. There are some exceptions to this, but they may charge higher fees and interest rates.
Overall, you want to make sure that your personal debt to income ratio is 36% or less, although there could be some situations where the lender will let it go up to 43%. If your debt-to-income ratio is a little bit high, then you may need to take a step back and pay off some debts before you consider doing a refinance.
Know How Much It Costs to Refinance
When you go to refinance your home, keep in mind there will be some costs associated with getting the work done. Many homeowners do not realize these costs are in place and are disappointed to see it may take them some time to break even, regardless of where the interest rates are at the time when they go to do the work.
While some mortgage companies will offer refinancing for no cost, there will still be some fees to worry about. These companies tend to add a higher interest rate onto the loan, which can cost you more over time. In general, it is best to assume you will need to put between 3 to 6% of the loan costs down to help with closing on that refinance.
Choosing to Refinance Your Home
No matter the reason why you choose to refinance your home, you need to be prepared and understand how the process is going to work. By looking over your finances and shopping around for the best rates, you will be able to get the refinance done without a lot of hassle. Take a look at some of the important considerations above to help you out.