Getting a mortgage loan to purchase a home is one of the most substantial financial commitments anyone can make in their life. Likewise, applying to refinance your mortgage loan is quite a process, as you’ll need to prepare both some paperwork and yourself financially to qualify for the best rate possible.
There are many things you must consider before deciding to take on a new loan to pay off your balance. This week’s mortgage rates are not always the most crucial factor in your decision to refinance.
Here are five factors you will need to consider before you refinance your mortgage:
1. Your Home’s Equity
The first factor you must assess is the equity in your home. By the end of the first quarter of 2020, home values continued to rise in the United States. CoreLogic reported that compared to the same time in 2019, borrower equity in the second quarter of 2020 rose by $620 billion. That meant an annual increase of 6.6 percent. Still, the national share of homes with negative equity was 3.2%, meaning that while borrower equity is on the rise, some homes may not have regained their value, leaving homeowners with low equity. Refinancing with little-to-no equity is very difficult with traditional lenders, so be sure to look at this first before making a decision.
2. Your Credit Score
Credit scores have always been a point of concern for borrowers, and for good reason. In recent years, lenders have raised the bar on credit scores in approving loans. Some consumers have reported that they did not qualify for the lowest interest rates despite having exceptional credit. Lenders usually want to see a 760 or higher credit score for you to be eligible for the lowest mortgage rates. Many lenders will give you a competitive rate on lower credit scores as well.
3. Your Debt-to-Income Ratio
You’ve gotten your first mortgage loan, so you may think it is easy to get a new one. However, lenders have become stricter with not only credit scores but with debt-to-income ratios as well. Although a few aspects, such as a high income, a lengthy and secure job history, or significant savings, help you qualify for a loan, lenders typically want your monthly housing payments under a maximum of 31 percent of your gross monthly income.
4. Refinancing Costs
Low-interest rates may seem like an opportunity to save, but there are costs to refinancing your home. It generally costs between 3 to 6 percent of the total loan amount, although you can look for numerous ways to reduce the costs or put them into a loan. If you have substantial enough equity, you can roll the costs into your new loan, although you’ll increase the principal.
However, some lenders provide a “no-cost” refinance. In this case, you will pay a slightly higher interest rate to pay for the closing costs.
5. Rates and Terms
While you may have your eyes on temptingly low-interest rates, you must figure out your goals when you refinance your home. That way, you’ll have an easier time finding the mortgage product that best meets your needs. If you want to lower your monthly payments, you’ll want to go for a loan with the lowest interest rate for an extended period.
However, if you want to pay less interest over the loan’s term, then look for the lowest interest rate with the shortest period. Those who wish to pay off loans as quickly as possible must consider a mortgage with the shortest term with payments they are sure to afford.
Like other financial transactions and processes, refinancing your mortgage is a complicated process that requires prior research and plenty of consideration. It may appear to be an ideal arrangement, but ensure that you consider these five factors first. When you’re ready, be sure to speak with a reputable lender to determine if refinancing is the right option for you.
Wondering if mortgage refinance rates are in your favor? Get in touch with us to find out! As industry experts, we have hundreds of loan options available and just waiting to accommodate our clients. Learn more about your mortgage refinancing options by contacting us today!