Reasons to Refinance and the Pros and Cons of Each
You have probably heard that interest rates are historically low right now for purchasing a home, but did you know they are also historically low for refinancing? We are currently in the process of refinancing our home. Why? Our interest rate was at 4.5%, and we had a 30-year term. With our refinance I got a low rate of 3.25% as well as a 20-year term instead of a 30-year without increasing our monthly payment! Like me, you may find that refinancing could save tens of thousands of dollars in interest and years of mortgage debt repayment. That means more money in your pocket to travel, do home improvements, or invest. Here are the Top 5 Reasons to Refinance Your Home now.
Can Refinancing Help You?
Before jumping into refinancing, after knowing which of the top five reasons to refinance are, consider what your goals are. More than likely the loan officer is going to ask you this over the phone, so have the answers ready for them. Do you want to lower your monthly mortgage payment? Do you want to pay off your mortgage and get out of debt faster?
It’s imperative that you take into consideration that there are closing costs and fees associated with refinancing. Depending on which new loan you choose, you may have to pay thousands of dollars in fees for your new mortgage. It may take several years to recoup the costs of refinancing, and it is important to identify your breakeven point. If you plan on moving soon, it may not make sense to refinance your home loan at all.
Do You Qualify for a Refinance?
#1: Home Equity: One factor for your refinance is your loan-to-value (LTV) ratio. To calculate your loan-to-value ratio, divide the amount you want to borrow by the current value of your home. For example, if your home is worth $250,000 and you want to borrow $210,000, your LTV is 84 percent. Most lenders look for a loan-to-value ratio of less than 80 percent to refinance. However, some loan programs are more flexible.
#2: Income: Total of your refinance payment plus other debts should be < 43% of gross income or your debt-to-income (DTI) ratio. Keep in mind that most lenders will require that you document your income with recent paycheck stubs, W-2 Forms or federal income tax returns.
# 3: Credit: Credit score should exceed lender minimums (usually 620-660). While there is no specific minimum credit score that you’ll need to refinance, keep in mind that if your credit is impaired, the interest rate and terms you’ll be offered might not make refinancing an attractive option. If you have a strong credit score, you’ll be offered a lower interest rate and better terms.
Qualifying to refinance your home goes hand in hand with maintaining stable financial health: Keep your debts low, your credit score high, and build equity. There’s no doubt about it: Lenders have tightened the guidelines they use to evaluate loan applications. For a quick way to check if you qualify for a refinance see the Mortgage Professors easy calculator here.