Lately, refinancing applications have accounted for a significant number of mortgage applications. This is because lower interest rates are giving home owners the incentive to restructure their mortgages. However low-interest rates might go, refinancing may not be a good option for you, or, it could be just the restructuring that your finances need. Let’s take a look at some of the main things that you should consider when thinking about refinancing your home.
Before you can refinance your home, you need to have equity in it. After the market crash in 2008 a lot of people ended up having homes that were not worth as much as they owed on their mortgages. The crash also resulted in a lot of people not having much equity in their homes. Refinancing for conventional lenders is going to be just about impossible unless you have around 10 to 15 percent equity in your home. If you don’t have this much equity in your home, it is going to be very hard for you to restructure your mortgage agreement. There may be some government programs available to help you to refinance you home if you have little or no equity. Remember, equity is the first thing you need to have before you move forward with refinancing.
Lenders have definitely tightened up their lending standards in the last ten years. You may be surprised to find out that even if you have a good credit score you may not qualify for the lowest possible interest rate when you refinance your home. Typically to get the lowest interest rates these days, lenders want to see a credit score of 720 or better. You can still refinance your home even if your credit score is lower than 720, but you need to be aware that you might not get the lowest possible interest rates as a result.
You may assume that since you already have a mortgage that you will not have a problem getting a new one. Well, not only have lenders tightened up their lending practices and standards, but they also have gotten stricter with an individuals debt-to-income ratio. High income, long and stable job histories are all positive factors that will affect your ability to get a loan still, but lenders are really keen to make sure that monthly house payments for an individual are no more than 28 to 31 percent of their monthly incomes. Overall, most lenders want to see individuals with debt-to-income ratios around 36 percent of gross monthly income at the highest. However, it is not uncommon for some lenders to go as high as 40 percent in the case of other circumstances such as a high-paying job etc.
The Cost of Refinancing
Before you go into to get your mortgage refinanced, you need to be aware that it is going to cost you anywhere from 1 to 3 percent of the loan amount in most situations. Oftentimes borrowers will find ways to reduce these costs or work them into the loan. In some cases, if you have enough equity in your home, lenders will allow you to roll these costs into your new mortgage loan increasing your principal. Also, some lenders offer no-rate refinancing, which is important for you to know. Generally, these loans will have a slightly higher interest rate to cover the closing costs that were advertised as “rate-free.” The key takeaway from this is to make sure that you find an experienced loan officer who can guide you when looking to refinance your loan. There are a lot of different ways that homeowners can go about refinancing. The important thing is to accurately assess your needs and find the lender that can best provide the lowest possible interest rate to you. If you’d like to learn more and talk about your refinance options I’m a phone call, email or text message away.