refinance

Is mortgage refinancing right for you?

When mortgage interest rates drop, many homeowners assume they should apply for mortgage refinancing.

Some homeowners today jump to refinance when the rate drops by 1 percent or less, but there are several factors to consider before deciding if a refinance is right for you.

Mortgage refinancing considerations

Think about your reasons for a mortgage refinance. Do you want lower payments? Do you want to pay off your loan faster? Do you want to switch from an interest-only or an adjustable-rate mortgage to a fixed-rate loan?

How long do you intend to stay in your home? If you plan to move within two years, a refinance may be a bad idea because you may not recoup all your costs.

Once you have established your reason for applying for a mortgage refinance, you need to compare your current loan to a potential new mortgage.

Can you qualify for a new loan?

Credit guidelines have tightened in recent years, so mortgage loan approvals are harder to come by. Talk to your current lender to find out if a streamlined program is available.

The four factors that determine whether you can refinance include:

  • Home value. A quick check on a website such as Zillow.com or with a local real estate agent can get you an estimate of your home value.
  • Equity. Many lenders require at least 20 percent equity in the home, but some programs are available that allow a refinance up to 100 percent or more of the property value.
  • Credit. The lowest rates go to borrowers with credit scores of about 720 or higher. Borrowers with a score of less than 620 may not qualify at all.
  • Debt-to-income ratios. Lenders have strict guidelines concerning the ratio of debt to gross monthly income, so even if you have good credit, you may not qualify for a new loan.

Contact your lender and shop around with one or two other lenders to see if mortgage refinancing can improve your financial picture.

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