With all the talk of super-low interest rates on mortgages, you might be itching to refinance your home loan. As intriguing as it might be, we encourage you to consider the following question, is it the right time and does it make financial sense? Are you looking to take cash out to maybe do some home improvements, consolidate debt, or simply refinance the existing balance? Are you looking to refinance to lower your interest rate? Maybe you’re looking to reduce your loan term? Whatever the reason may be, here are some tips that might help you decide.
Know what the lender is going to look for: If you’ve never refinanced before, the good news (or bad news depending on how you look it) is that technically you’ve been here before. Yup, this refinancing process is very similar to the purchase process, except this time you already have the home. Most lenders have very specific requirements for their mortgage approvals and for refinances specifically, one of the key factors that they will look at is going to be the value of your home. If you haven’t already, it might be a good idea to check the value of your home first, which can be done through our Home Value resource. Once you get an idea of the value of your home, you then want to review your mortgage balance to see how much you owe. Once you know those two numbers, you’ll be able to calculate your equity, and determine if you meet your lenders minimum requirement, which traditionally is around 20% equity.
The next thing you’ll want to do is review your credit. Your credit score will impact what interest rate you’re going to qualify for, how much you might be able to borrow, what loan program you may be approved for, as well as how much your closing costs will be. Remember, the higher the credit score the better (aim for a credit score of 680 and above).
Your current income and outstanding debts are also going to be factors that lenders will look at, so be prepared with account statements, paystubs, tax returns and anything else that you think you might need for verification purposes.
Next, make sure it makes sense for you! When deciding on whether you should refinance, another question that I encourage you to ask yourself is… do you plan to stay in the home. This is important because, refinancing does come with a cost. One way to determine if it makes financial sense for you, depending on how long you plan to stay in the home is by calculating your Break Even Point (BEP). You can calculate your BEP by taking the total closing costs and dividing it by the total savings per month. For example, let’s say your closing costs are going to be $7,000, but you’re going to be saving $200 a month. That would make your BEP 35, meaning that you would break even after close to three (3) years. If you know you’ll be in the home that long, then it makes sense, if you plan on selling or leaving, you may want to rethink it. The good news is you can play with all these calculations ahead of time. You can access our Refinancing Calculator to start playing with some numbers.
As we mentioned earlier a lot of folks are looking at refinancing to lower their interest rate, so here is a little rule of thumb we like to share. If your interest rate is going to decrease your rate by at least one percent, then the savings over time will most likely make sense.
Finally, we’ve mentioned closing costs a few times, so let’s touch on what those costs consist of. Most of the fees are associated with starting a new loan, including your loan application, origination fees, insurance, escrow (If included in your monthly payment), and more. Good news is you can also calculate what those fees will look like for you based on your loan amount, credit, and term well before even starting the process. Visit our Mortgage Center and get a personalized quote today.
If you’re interested in finding out more about Refinancing your Mortgage, we invite you to join us for one of our Refinancing your Mortgage Live Webinars. Our sessions are free, and anyone can join. Visit our Financial Education page to find and register for an upcoming session.
If you have additional questions or would like to connect with a Partners Mortgage Advisor, you can schedule an appointment today!