Whenever interest rates are rising, it’s essential to be aware that the sooner you make the decision to refinance your mortgage, the better price you can expect to get. But this doesn’t mean mortgage refinancing should be taken lightly, as it’s a decision that can impact your future significantly — for better or worse.
What Is Mortgage Refinancing?
Essentially, mortgage refinancing is where you pay off an existing loan and replaces it with a new one; usually it is either to shorten the term of a current mortgage, convert to a different type of mortgage, cash out home equity to finance a larger purchase, or get a lower interest rate.
As refinancing typically costs between 3% and 6% of a loan’s principal and requires things such as application fees, evaluation, and title search, it can be an initial expense to homeowners. You must determine whether refinancing is financially viable and wise beforehand.
The Importance of Your Credit Score
It’s critical to know your credit score before you want to start this process because lenders determine what they will pay based on it. Typically, lenders prefer credit scores of 760 or higher; this gives the best chance of qualifying for a lower mortgage interest rate. For those who have a lower rating, the rates and fees they pay may be higher than this. One of the main reasons for getting a mortgage refinanced is to get lower interest rates and pay less on the loan. However, if your credit score is poor, you may find that refinancing doesn’t save you anything.
Debt-to-Income Ratio
Your debt-to-income ratio is essentially something that measures your debt against your gross income. Although lenders will take into account your savings, your income, and your job history, they will also want to know what your monthly housing payments are; typically, they want something that is under 28% of your gross monthly income. Your debt-to-income ratio is preferred to be 36% or less. But, there’s wiggle room depending on your situation and circumstance.
Home Equity
Your home equity fluctuates over time, depending on payments made on the mortgage and the current market’s value price for the property. If you have little to no home equity, it’s not always possible to get your mortgage refinanced. Overall, homeowners that have at least 20% equity will find it easier to obtain refinancing.
The Costs of Mortgage Refinancing
Thankfully, there are ways to reduce mortgage refinancing costs. For example, if you have enough home equity, you could combine the costs into your new refinancing, increasing the principal (or face value). Some lenders also offer something called a “no-cost” refinance; however, no-cost refinancing often means that you end up paying slightly higher interest rates to cover closing costs.
Comparison Shop
Just like if you were looking for the best deal for your car insurance, you wouldn’t latch onto the first refinancing deal you came across. You’d do your research and compare what interest rates and deals you can get before making a decision. Another thing to consider are the points offered by the lender when shopping around; the more points purchased, the lower the interest. Customer service is also an important aspect to consider; be sure to hire a lender who is concerned with your best interests.
Know Your Goals
Do you want a loan with a lower interest rate over a more extended period? Or do you want to reduce your monthly payments? Whatever the reason, it’s essential to know why you want to refinance before deciding. Once you have your goal defined, then you can then choose an appropriate loan. For example, if you want to have lower monthly payments, then look for a loan with the lowest interest rates over a more extended period. And if your goal is to pay off the loan as quickly as possible, then look for a deal with offers the shortest term at payments you can afford.
Shorter-Term Loans
Shorter-term loans are an excellent option for homeowners who have money and want to get rid of their debt as soon as possible; you have increased payments, but your loan has a shorter term and can be paid off sooner. For example, instead of a thirty-year fixed-rate mortgage, you could reduce this to a fifteen-year mortgage instead. That being said, if higher payments for a shorter loan term is impractical, then you can cause a lot more issues and discomfort for yourself.
Ready to Refinance Your Mortgage?
Mortgage refinancing is an excellent option for many homeowners. You can shorten the term of your current mortgage, decrease payments, or change the type of mortgage you currently have. But whatever your reasons, make sure that this is a decision that is right for you and your circumstances. Though you want to decide in good time to get the best deal, don’t rush into it. Shop around and compare different lenders; check their interest rates, points, and overall customer service. After all, it’s important that you feel secure and safe that the decision to refinance is the right one for you.
Photo Credit: stock photo
If you have spare money around at the end of the month you could also, if your mortgage allows, pay down extra on the principle which will shorten your mortgage term and slash the amount of interest you will pay over the life of the mortgage. You send a separate check and CLIP A NOTE TO IT INDICATING YOU ARE PREPAYING ON PRINCIPLE. THIS IS IMPORTANT SO THE MONEY GOES WHERE YOU INTENDED IT TO GO, TO REDUCE THE PRINCIPLE. With this technique you don’t spend a penny on refinance charges, you pay extra on the months you have spare money (get a part time job and dedicate all that money to the prepayment and watch your balance melt away!) Get an amortization schedule and see how quickly the balance melts (the first half of the mortgage period is the most lucrative for the buyer when paying extra on principle). You can do this without reams of paperwork, new mortgage fees and no depressing inquiries about your low credit score if you have one.