If you’re a mortgage holder, you understand that refinancing can help you in many ways. A low-rate home loan can help you achieve most of your financial goals. Refinancing can help you pay off your original loan with a new one under better interest rates and favorable repayment terms. Homeowners refinance their loans to get lower interest rates, boost their savings on monthly payments, pay mortgages quicker to own their home sooner, or turn home equity into cash.
A 2021 report shows that consumer confidence has risen after the COVID-19 pandemic. This upward trend among U.S. citizens translated into a 29.3% equity increase in the second quarter of 2021. It may be the right time to consider refinancing if you’re among the population experiencing positive equity change.
Unfortunately, mortgage refinance is not the right option for every homeowner. Sometimes, it does not lead to lower housing expenses or lower interest rates.
9 Important Things You Should Know Before Refinancing
The following essential refinancing tips will help you decide if mortgage refinance is the best choice for you. Here are the nine things you consider before refinancing.
1. Decide Your Refinancing Goal
Knowing why you want to refinance your mortgage loan is an important tip in this process. You will not enjoy the new loan’s benefits if you do not have specific goals and needs. Common reasons for refinancing include:
- Getting a better interest rate on the loan
- Lowering monthly repayments
- Eliminating Private Mortgage Insurance (PMI)
- Accessing your home’s equity
Whatever your reason for refinancing, make sure it’s worth the process and cost. Remember that each benefit has pros and cons. However, these financing tips allow you to align your financial objectives with your needs.
2. Prepare for An Appraisal
One of the most important refinancing tips is knowing the value of your home.
Your home’s current value remains an essential factor in determining whether your mortgage is eligible for refinancing. An independent party will visit your home to determine its market value. Conventional refinance mortgages use the appraised value to calculate the loan-to-value ratio. Your home’s appraised value determines the direction of your plan to refinance. You can get the best refinance offer by getting the best appraisal report for your home. You can do the following to get the best appraisal:
- Ensure the appraising professional knows about recent renovations and upgrades by providing them with receipts and documents from credible contractors.
- Tidy the interior, add curb appeal, and spruce up the yard.
- Answer the appraisal professional’s questions on time. Be present during the appraisal if possible.
Always ensure that your home appraisal is in your favor before exploring the available refinancing options.
3. Look at Your Equity
Loan-to-value (LTV) ratio is an important factor in refinancing. Lenders use LTV to determine refinance interest rates and homeowners’ eligibility. Your equity is part of this important LTV ratio. It helps the lender access your borrowing patterns compared to your home’s worth. Subtract the outstanding mortgage loan from the home’s current value to determine your equity. Generally, a low LTV ratio is better for you. Most lenders will not refinance your mortgage if the loan-to-value ratio exceeds 80%. Sometimes, you’re forced to pay extra if you don’t have enough equity to refinance because your home value has fallen since its purchase.
4. Consider the Period You Intend to Stay in Your Home
Think about your future in that home before you consider refinancing. Remember, there is not much difference between the process of getting a first mortgage and refinancing. You may be required to pay the closing fee for mortgage refinance. It is good to compare the amount you intend to save and the closing costs. It may be difficult to determine the period you intend to live in your mortgaged home. However, even a ballpark figure can help you know if you will save money by refinancing or if it is not worth the effort.
5. Know Your Credit Score
Lenders will want to know your credit score before approving your refinancing loans. You may be surprised that you do not qualify for the lowest interest rates, even with good credit ratings. However, the good news is that lenders require lower credit ratings for people looking to refinance than for those purchasing mortgages. Most lenders accept a credit rating of at least 620, but you can qualify for a mortgage with a credit score of 500 if you are going for government-backed mortgage programs, such as FHA loans.
6. Check Your Debt-to-Income Ratio (DTI)
Lenders check your DTI to determine if you can afford to service another debt payment. Most people assume they can easily qualify for refinancing because they already have a mortgage loan. Unfortunately, this is not true because lenders use strict DTI ratios and credit score requirements. It is recommended to spend 28% of gross monthly income on monthly housing repayments. Although some lenders can accept a DTI ratio of 43%, the recommended ratio should be 36% or less.
7. Estimate the Cost of Refinancing
Consider the break-even points to determine if a mortgage refinance is financially beneficial. Mortgage lenders often charge an upfront fee that can amount to approximately 3% to 6% of the total loan as the closing costs. Some of the refinancing fees include:
- Recording fee
- Reconveyance fee
- Home inspection fee
- Processing/Underwriting fee
- Credit report fee
- Origination fee
- Application fee
Borrowers can find different ways to reduce these closing fees. One way is by finding a lender that offers no-closing-cost refinancing. However, this means you will pay a slightly higher interest rate. The lender can agree to roll over the new loan cost by increasing its principal amount for a mortgage holder with enough equity. Consider different offers because some lenders can help you pay some refinancing fees.
8. Know Your Taxes
Refinancing is an important tool for people looking to lower their tax deductions. Mortgage interest deductions can determine your federal income tax bill. However, some people avoid refinancing because of high-interest deductions within the first repayment period. You do not wish to become a victim of mortgage lending discrimination. You can report to the Consumer Financial Protection Bureau (CFPB) if you feel discriminated against by lenders.
9. Compare Different Mortgage Refinance Rates
Different lenders advertise mortgage refinance rates to attract mortgage holders. Compare interest rates and refinancing points that can reduce your overall rate. You can choose a few lenders with the best rates for a mortgage refinance. This financing tip allows you to get a loan at the best terms. Remember, applying to several lenders cannot affect your credit score. Lock in your refinance rates to avoid paying more if the national interest rates rise.
The Bottom Line: Find a Reliable Lender for Your Refinance
Are you still considering refinancing your mortgage? These financing tips will help you decide, but refinancing is a personal decision. Lenders have plenty of no-obligation tools to help you explore your options. Run your numbers to ensure it is the right time and decision to refinance. Find a reliable mortgage lender who can help you understand your options further.
