Things You Absolutely Need To Know About Refinancing Your Home
Often, many people make the mistake of seeing the application for a refinance of their homes is all they need to do anytime they want to. When and how to apply for a refinance can be an expensive and stressful process.
Thus, you must get ahead of many things, such as the needed information, resources that make you qualify for a refinance, and if refinancing is best for you at the moment.
When refinancing your home, you must consider some important factors. There are some reasons why you may want to refinance your home. For example, lower interest, cashing out your equity, home improvement, and reducing the amount paid as a loan monthly.
This article will help you learn some helpful things about refinancing your home.
What Is Refinancing?
Refinancing your home is going through your existing mortgage loan agreement and replacing the terms with new ones. Usually, when you refinance your home, the aim is to efficiently make positive changes to the payment schedule, interest rate, and other terms stated in the existing contract.
Below are some reasons you may have to refinance your home.
- Maybe you are tired of the unstable interest rates that come with your adjustable-rate mortgage, and you want to convert it to a fixed-rate mortgage.
- A situation where you need cash to fund the buy of an item or improve your home.
- A means to reduce monthly debt payments by consolidating debt through a cash-out refinance.
- Another reason is to earn more cash in the long run by reducing the interest rate on your home loan.
- You may also want to consider refinancing when you want to lower the term for paying your loan in full. You can do this by slightly increasing the monthly installments you pay.
As you read this article further, you will learn what you need to refinance your home.
Calculate Your Home Equity
You can calculate your home equity by subtracting the unpaid amount on your mortgage from the current market value of your home.
It would help if you calculated your equity to determine the cost of refinancing your home in the long term, and it helps you follow the process according to your budget. Equity also helps you to determine if it is the right time to refinance your home.
Equity can be low and even negative (a situation where your home’s market value is lower than your outstanding mortgage). A low or negative equity indicates that it is not the ideal time to refinance your home.
Usually, many lenders don’t allow refinancing with low or negative equity; however, it may be easier with some government programs. Also, you must know that lenders often don’t allow you to refinance more than 80% of your home equity. The ideal way to know is to discuss your chances with the lenders.
Consider Your Finances
It would help if you ticked all boxes concerning your finances when refinancing your home. Before applying for a refinance, you must have all the necessary information about your finances to help you navigate the whole process without a problem.
Factors such as high monthly earnings, considerable savings, and long stable job history can boost your chances of getting a refinance. Many lenders often require your monthly installments paid on your home loan not to be more than 28% of your gross monthly income.
In addition, a 36% debt-to-income (DTI) ratio or less is often needed to qualify for a new loan. Paying off some of your debts can be a good starting point to boost your chance of refinancing your home.
Furthermore, another important factor that lenders consider about your finances is your credit score. A credit score is used to determine how worthy a person is to obtain a credit, and it is a number between 300-850. It is used to predict the ability of a person to pay back the money borrowed; the higher your credit score, the bigger your chance of obtaining a loan.
Lenders usually consider a credit score of 760 and above for low-interest rates. Although you may obtain loans with lower credit scores, you will have to pay higher interest rates.
You must know that the costs and fees paid to refinance are the same as when you buy a home. Lenders will likely require an appraisal, credit report, title, escrow, and other underlying fees. These fees add up to become significant and must be considered when you decide if you need to refinance your home.
The cost of refinancing a home is often between 3% to 6% of the loan amount. However, with adequate information, you can find means of reducing it or having it added to your loan. Enough equity helps you to add refinancing costs to your new loan.
Decide If You Should Refinance Your Home
As stated earlier in this article, there are many reasons you can apply for a home refinance. Knowing if refinancing is right for you is down to the home loan interest rates, your refinancing goal, how long you want to remain in the home you want to refinance, and the cost of refinancing. Due to many factors in play, there is no straight answer to the question, “Is it wise to refinance?”.
The answer will be different for a person whose goal is to pay up his loan in the next 5 years compared to someone who wants to earn cash in the long run with lower interest rates. Also, a person not willing to stay longer than a year and who intends to remain in the home for the next 15 years would have different opinions.
The important thing is to set your goals and consider all factors when deciding if and when to refinance your home.
Get Your Home Refinanced
Refinancing your home can be the best thing that happens to your finance. If you plan to continue staying in your home for a long time, a more than 0.5% decrease in interest rate can go a long way in making a significant difference in your budget.