Refinancing your mortgage is a big decision that requires careful consideration. In a competitive market with low mortgage interest rates, many homeowners are tempted to refinance as soon as possible. However, refinancing your home mortgage before you’re ready could have negative consequences on your financial situation. Keeping this in mind, we’ve made a list of five things you need to check before you decide to refinance. Read on to know what they are.
Work out Your Home’s Equity
The first piece of info you will need to analyze is the amount of equity you have in your house. If your home is now valued less than it was when you started your mortgage, you are in negative equity, and refinancing your mortgage makes no sense.
Evaluate Your Credit Score
Lenders have modified their loan approval conditions in recent years.
Some prospective loan applicants may be surprised to learn that even with excellent credit, they may not always be eligible for the lowest interest rates. To qualify for the lowest mortgage rates, lenders typically want you to have a credit score of 760 or more. Borrowers who have poor credit scores may still be able to secure a new loan, but they may be subject to high-interest rates or fees. If you have an undesirable credit score, consider working on improving it before you apply for a loan.
Determine Your Debt-To-Income Ratio
If you already have a home mortgage, you might think that getting a new one will be simple. However, lenders have not only upped the credit score bar but have also become more stringent with debt-to-income (DTI) ratios. While having a high income, a lengthy and stable job history, or considerable savings may help you qualify and get approved for a loan, lenders often want to keep monthly housing expenses under 28% of your total monthly income. Overall, your DTI ratio should be 36% or below.
The Cost of a Refinance
Refinancing a home typically costs 3% to 6% of the overall loan amount, but there are various options for borrowers to lower the costs. Some lenders offer “no-cost” refinances, which normally entail paying a slightly higher interest rate to offset the closing fees. Remember to bargain and shop around because some refinancing fees may be waived or decreased by the lender.
