February 17th, 2010
Refinancing: 3 Simple Questions To Ask Yourself
Refinancing may be the a great financial move to make if it reduces your current interest rate, enables you to cash out some equity in your home, or offers a more stable payment schedule with a fixed loan. Refinancing can be a tricky decision as the benefits often come with unexpected fees and costly hassle.
If you are considering refinancing your home, evaluate whether you stand to reap benefits or if you’re better off sticking with your current mortgage by asking these 3 simple questions:
- What does your credit score and debt-to-income ratio look like? – Your credit score and debt-to-income are critical factors in refinancing. Your credit history shows lenders what kind of borrower you are and your income suggests your propensity to make payments. Credit score also helps to determine what interest rate lenders will offer; if your credit score is too low to earn you a worthwhile offer, actively manage your credit score before pursuing refinancing. For debt-to-income ratio, lenders typically look for a ratio lower than 38% (guidelines can vary). Improve your ratio by including additional sources of cash flow—like rent, annual bonuses, etc.—when documenting income, and develop a plan to reduce your overall debt.
- How much equity do you have? – With the current home market, lenders will likely require at least 20% home equity, which is measured as a component of the loan-to-value (LTV ratio) of the home. That means that not having enough equity in your current home rules out the option of refinancing all together.
- What are you trying to accomplish? –The current trends of record-low mortgage rates make refinancing an appealing prospect, but take into account all possibilities of the transaction. Do you want to shorten your loan term from a 30-year fixed to a 15-year fixed? Do you plan to sell your home in the next few years? If so, it may make more sense to keep your current mortgage plan. Do you have an adjustable rate mortgage, and want to make payments more affordable by switching to a fixed rate loan? Know your finance goals and prioritize them as you explore your options.
The most important factor to consider when refinancing is how much you stand to save. Do the extra math to calculate how long till you break even, how much your total loan cost will be at the end of the term, how much you save by lowering monthly payments, and if you can realistically afford to refinance. Lenders typically advise to refinance if homeowners can get a rate at least two percentage points lower than their existing mortgage. While the current market’s low mortgage rates are enticing, make sure refinancing will give you tangible, worthwhile savings to make up for its hassles and expenses.
Related posts:
- Is It Time to Refinance? If you are homeowner, you have no doubt been watching home prices and the subprime mortgage driven collapse of the...
- Refinancing Adjustable Rate Mortgages With interest rates so low, and the unstable housing market, many people still in adjustable rate mortgages have been attempting...
- Ready to Refinance? With Obama’s new Making Home Affordable Plan recently released, its time for another post about refinancing and how to make...
- Refinance Now? In this sunny mortgage climate, you might be wondering if you should join the recent frenzy of home refinancing. If...
- Top Credit Questions – Mortgages & Credit Scores The rule of thumb in today’s economy is that you need a 720+ credit score to qualify for decent mortgage...
