Personal financial circumstances are the only thing that should influence your decision to refinance. Here’s what to consider before you apply to refinance your home.
Home Equity
Work out how much equity is in your home. If the house is worth less now than it was when the mortgage began, do not go in for refinancing. Conventional lenders may not even agree to refinance under these circumstances. But there are government programs available if you need them.
Credit score
Lenders prefer those with a credit score of 760 or higher to qualify for the lowest mortgage rates. Borrowers with lower credit scores may also get approved but will have to pay higher interest rates.
Debt-To-Income Ratio
Lenders are now significantly stricter with their debt-to-income ratio criteria. A high income, long and stable job history, and substantial savings will help you qualify for a loan. But lenders prefer applicants who can keep monthly housing payments under 28% of their gross monthly income. Therefore, your DTI ratio needs to be 36% or less.
Refinancing costs
Refinancing usually costs between 3% and 6% of the loan amount, but there are ways to reduce them. With enough equity, the costs can be rolled into the loan. Some lenders offer “no-cost” refinance as well but charge slightly higher interest rates.
Rates vs. Term
If you want to ensure that your monthly payments are the lowest possible, you want a loan with the lowest interest rate for the longest term. But if you want to pay less interest over the length of the loan, you need the lowest interest and the shortest term. Use a mortgage calculator in order to work out what is best.
Discount Points
While comparing offers, check out if discount points are an option. You can pay for discount points to bring down the interest rate. Calculate how much you will need to pay to buy down the rate with points across different lenders. Then, consider if this is a good option.
Breakeven Point
Calculate the point at which the costs of refinancing get covered by your monthly savings. After this point, your savings are yours alone. Depending on the duration, it may or may not make sense to refinance.