Low-interest rates have incentivized many homeowners to refinance their existing mortgages. While refinancing to a low-rate mortgage can help homeowners save money, it’s important that you not decide whether or not to refinance based on recent rates alone. Here are five things you need to take into consideration before applying for a refinance.
Know how Much Equity You Have
Before you start comparing refinance loans from different lenders, work out how much equity you have in your house. If your home is actually worth less now than when you purchased it, it doesn’t make sense for you to refinance your loan. Some lenders may also require that you have a 20% equity in your home to be eligible for a refinance loan, so check whether you qualify.
Check Your Credit Score
If it’s been years since you got your original mortgage, it’s important that you check your credit score as well as the credit requirements of different lenders. In recent years, mortgage lenders have tightened their standards for mortgage/refinance approvals, so you may need to have a fair or high credit score to get approved for a refinance loan. Remember, your credit score can affect the rate of interest quoted to you. If your credit has dropped off late, it may be best to put off refinancing your home until it improves.
Work out Your Debt-To-Income Ratio
If you’re already in the process of paying off a home loan, you may assume you can easily get a new one. But that’s not true. Not only have mortgage lenders increased their standards for credit scores, but they’ve also become pretty strict about prospective borrowers’ debt-to-income ratio. Most lenders in the country require you to have a debt to income ratio under 28% to qualify for a loan.
Understand the Costs of Refinancing
Most people check the interest rate and assume they can save a lot of money by refinancing. But that’s only true if the costs of refinancing the loan are also affordable. Refinancing can cost anywhere between 3% and 6% of the entire loan amount. If you don’t have too high a balance left to pay off, the refinancing costs may eat into the money you stand to save.
