Here are 5 Things You Should Know Before a Mortgage Refinance

 

The idea of diving right into a mortgage refinance seems like a harmless decision but you should actually know a few things before you get into the process. Refinancing your mortgage is a big deal and should not be taken lightly, make sure to do your research, or have someone help you, so you know what to expect before you jump in.

 

1. The first thing you should know about before doing a mortgage refinance is your home's equity. This is one of the first things to be examined when filing your application to refinance. If you have a home that is underwater, then you do not have any equity in your home; this means that you owe more on your mortgage than what your home is worth. Some homeowners do not have a lot of equity in their homes and some have a lot, it depends on your mortgage and your handling of it. If you refinance with little to no equity, you may not be able to use a traditional lender.
2. Your credit score is a biggie. When lenders analyze your application, they will look up your credit score and use it to determine what your mortgage interest rate is on your loan. The lower your credit score, the higher your rate will be; some lenders will completely deny you if your credit score is not high enough. Lenders like to see scores of 720 or better in order to give borrowers a good rate.
3. Your debt-to-income ratio. Due to mortgage rules that were put in place in January of 2014, your debt-to-income ratio has to be pretty solid, the rules for this have gotten tighter. Having a larger income from a stable job that has history is a good place for you but it does not guarantee approval. You will also need good savings and management of money. Now in 2014, borrowers cannot have debt exceed more than 43 percent of their gross monthly income (gross, not net); however, some lenders play it safe and stay below 36 percent.
4. The refinancing costs. For many lenders, refinancing a mortgage costs between three and five percent. However, if you have enough equity in your home, it is possible to roll the new costs into the new loan.
5. Your rate and term. It is important to look at the rate but do not forget about the term of your loan. The term will impact the rate as well as what your monthly payment will be. The longer the term, the higher the rate but lower overall monthly payment than a shorter term (which will have a lower rate and higher payment).

 

The bottom line is to look at your situation and see what works best for you. Trying out a mortgage calculator will help as well as contacting a lender or broker.