If it feels like everyone around you has been refinancing their mortgage loans, you may be right. Many people choose to refinance when interest rates are lower than average.
With friends and family refinancing, you may feel encouraged to look into it, too. Just remember that this is a personal decision, based on your current financial health and homeownership goals.
Let’s dig into some important refinancing considerations to help you weigh your options. If you decide to move forward, these points will help you prepare to speak with your loan officer and get started.
Refinancing considerations for homeowners
Refinancing a mortgage simply means you’re getting a new loan for your home. Your new mortgage loan pays off the old one, and in the process you work with a loan officer to make favorable changes to your interest rate or terms in the new contract.
People may choose to refinance for one or more of these reasons:
- Use the equity in their home to get cash out and pay for other expenses
- Lower their monthly mortgage payment
- Lower their interest rate
- Pay off their mortgage faster
While these are all positives, refinancing may not be for you if you’re not in the right place financially. That’s why you should make the following considerations prior to undergoing the refinancing process.
1. What is your home’s equity?
To qualify for a refinance, you need to have at least 20% equity in your home. If you have less, you will need to make monthly Private Mortgage Insurance (PMI) payments, unless you are a veteran.
To calculate your equity, first determine your Loan-to-Value ratio (LTV). An LTV of 80% means you have at least 20% equity in your home. Calculate the LTV by taking how much you owe on your current mortgage and dividing it by the current value of your home.
Your loan officer will use your LTV to determine not only if you qualify for a refinance, but to also advise on the other terms and choices you will have on your new loan.
2. Know your financial basics: credit score and debt
Your credit score and Debt-to-Income ratio (DTI) are just as important when refinancing as they were when you first applied for a mortgage loan.
Check your credit report and calculate your DTI prior to applying for a refinance to make sure your numbers are where they should be. It is often best if your DTI is at or below 50%, as qualified through underwriting.
Consider paying down debts and working on your credit score prior to refinancing. Your dedicated loan officer can help you determine a strategy to make your refinance goals a success.
3. What are the costs to refinance?
To close on your new loan, you will have some additional fees and costs, just like you did when you got your current mortgage. For refinancing, these costs usually range between 2% to 4% of the loan amount.
These costs include:
- Appraisal
- Underwriting and application
- Title fees
- Settlement fees
- Document fees
- Mortgage broker fees
You will need to determine whether the savings of your new loan make up for the costs to close it. Will the money you’re saving each month with your new mortgage allow you to quickly make this money back?
4. What are your current and long-term goals?
When you refinance, you have many decisions to make that will revolve around your current and long-term goals. This includes your purpose for refinancing, how long you intend to stay at your property, and what you can afford.
Cash-out refinance
If you’re looking to do a cash-out refinance, you are replacing your existing loan with a larger one and receiving the difference in cash.
People choose to do a cash-out refinance to pay for large expenses, such as high-interest debts, home improvements, or other costs.
Rate-and-term refinance
A rate-and-term refinance loan, on the other hand, allows you to lower your interest rate or change your term length, such as switching from a 30-year mortgage to a 15-year.
If you want to do a rate-and-term refinance, you must determine beforehand how much you are able to afford each month and how long you want to pay your mortgage. You also must determine whether you want a fixed-rate or adjustable-rate mortgage, as each come with their own risks and benefits long-term.
If you’re refinancing to pay off your loan faster, will you be able to afford these payments long-term? You will need to take into account your employment goals and whether you will be able to maintain this amount with your income and other expenses.
5. Keep your taxes in mind
Do you use your mortgage interest deduction to reduce your federal income tax bill? If so, refinancing and paying less interest on your new loan could reduce your tax deduction.
Tax rules are complicated, so if you have any concerns about whether refinancing will affect your filing, consult with a tax advisor to be sure.
Discuss your refinancing considerations with a loan officer
Remember that the decision to refinance is personal, and based on your own unique situation. If you’re feeling uncertain about all of the financial considerations to weigh, know that the River City Mortgage team is here to help.Our team of experts values building relationships, and being able to provide guidance on your specific scenario. Get started with a rate quote or call us today to ask questions. We look forward to helping you dig into your options.
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