Many homeowners refinance their mortgages to get lower rates. However, that doesn’t mean refinancing is always the right choice for your finances.
If you’re considering refinancing your mortgage, look closely at the process before agreeing. To help you get started on making an informed choice, discover the top five things you should know before signing a new mortgage agreement.
1. Your Home’s Equity
Your home equity is its current market value. If your home’s value is below what it was worth at the start of your mortgage (negative equity), you should avoid refinancing your mortgage.
Some conventional lenders allow refinancing with no or little equity, while others do not. Before applying for a loan, it’s advisable to speak directly with a mortgage refinance company and learn whether it can consider your application. Even if your case is considered, you may not enjoy low mortgage rates.
2. Your DIR (Debt-to-Income Ratio)
Even if you already have a loan, a lender will not give you another one easily. Lenders check credit scores and consider DTIs (debt-to-income ratios). When you are servicing more than one loan, your DTI ratio may be low, leading to your loan application being declined.
Having substantial savings, a stable and long job history, and a high income can boost your DTI ratio and increase your chances of qualifying for refinancing. Still, lenders want you to keep your monthly home repayments below 28% of your monthly income.
Generally, a DTI ratio of 36% or less is acceptable, while a few lenders can accept as high as 43%. If your DTI ratio is above these figures, you can pay off some debts before applying for refinancing.
3. Your Credit Score
Your credit score plays a significant role in determining your loan and mortgage refinancing terms. Lenders have raised their standards when it comes to loan approvals. The standards are even tighter when refinancing. So it can come as a surprise to you that even if you have a good credit standing, your loan application can still be declined.
Ordinarily, most lenders want credit scores no less than 760 to get friendly interest rates. But even with this impressive credit score, a lender may decline your application. So, before you apply for refinancing, check your credit score.
It may be easier to get a loan if you’ve been paying your mortgage consistently. It’s worth mentioning, however, that, even with a low credit score, some lenders can offer you loans, but the fees and interest rates can be very high.
4. Term vs. Rates
Don’t only focus on the interest rate but also on the loan term. The interest rate can be low, but you’ll ultimately pay more if you have to repay the loan for many more years than your original mortgage. So before you agree to low-interest rates, ensure that the term is still short enough to warrant refinancing.
5. Refinancing Cost
The cost of refinancing a mortgage ranges between 3% and 6% of the borrowed amount. However, some lenders have found a way of lowering loan costs to entice borrowers. Some even wrap the new loan into the old loan.
If you get a good lender, you may get a new loan at no cost. In such a case, your interest rate will be a little higher to cover the cost you’d have paid for the loan. So, when seeking to refinance, don’t confine yourself to one bank or offer. Shop around and ask questions before choosing your lender.
Saving Money on Your Mortgage
Mortgage refinancing can bring you a sense of relief if you find yourself walking on a financial tightrope. However, it can also become a nightmare if you don’t play your cards well. But now that you’re aware of these five crucial factors, you can get a loan on fair terms and take advantage of saving every month.
