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 considerationsThink 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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