Thinking about refinancing your mortgage? If so, you are in great company. As per data compiled by the Mortgage Bankers Association, refinance applications accounted for around 60% of all mortgage activity in the 1st week of October, driven by lower mortgage rates that have fallen since the spring to below 4%. But do not allow mortgage rates alone to determine your decision to refinance. Refinancing a mortgage includes paying off an existing loan and replacing it with a new one, and that cannot be the right move for each homeowner.
The current mortgage rates
It does not make sense to refinance your house loan unless they are low than what you are presently paying. Before you begin submitting apps, check the present mortgage rates to see how they compare with your existing mortgage. Also, keep in mind that because mortgage rates are low now, that does not mean they will stay that way. If reducing your interest rate and every month’s payment are your top priorities, begin applying sooner instead of later.
Know Your Credit Score
Now, for loan approvals, there are tightened standards for loan approvals in recent years. A few customers may be surprised that even with good credit, they won’t qualify for the lower interest rates. Usually, lenders want to see a credit score of 760 or higher to qualify for the lower mortgage interest rates. Borrowers with low scores may still get a new loan, but the interest rates or fees they pay may be very high.
Know Your Debt-to-Income Ratio
If you have a mortgage loan, you may assume that you can easily obtain a new one. But lenders haven’t raised the bar for credit scores; they’ve become stricter with debt-to-income ratios. While some factors like having a higher income, a long and stable job history, or substantial savings may help you qualify for a loan, lenders want to keep every month housing payments under a maximum of 28 percent of your gross every month income. Overall, debt-to-income needs to be 36 percent or less, though with some more positive factors a few lenders will go up to 43 percent. You may want to pay off few debts before refinancing to qualify.
The Costs of Refinancing
Refinancing a house costs between 3 percent and 6 percent of the total loan amount, but borrowers can find many ways to reduce the prices (or wrap them into the loan). If you have sufficient equity, you can roll the prices into your new loan (and thus, increase the principal). A few lenders provide a no-cost refinance, which means that you’ll pay a slightly high-interest rate to cover the closing costs. Do not forget to negotiate and shop around because some refinancing fees can be paid by the lender or even reduced.
If you put down less than 20% when you first bought your house, you may be paying private mortgage insurance (PMI). With a few government-backed loans, you may be paying some other form of mortgage insurance. Depending on how much your house value has increased and how much of your current loan you have paid down, although, refinancing may help you remove mortgage insurance from your every month payments, increasing your savings.
Your new mortgage terms
Refinancing does not let you get a new interest rate but a new repayment term. You can select between a 10-year, 15-year, or 30-year mortgage. While a short term will make sure you will be debt-free sooner, you will want to ensure you have sufficient room in your budget for a high every month payment. And while resetting to a 30-year mortgage again can reduce your every month payment, it’ll result in more interest over the life of the new loan. Visit an online marketplace such as Credible to view refinance rates and loan options.