Refinancing your mortgage is an excellent way to save money and shorten the term of your loan. But you need to do your research to see if a refinance is right for you. Interest rates are at historic lows, but a low rate alone is not a reason to refinance. Here is a mortgage refinance checklist to help you determine if refinancing your existing mortgage is a good financial move.
Equity
In order to refinance you will need to have equity in your home. The more the better, but it is a good idea to not try to refinance unless you have at least 20% equity. Homeowners with 20% or more equity will have a much easier time qualifying for new loans. Having less than 20% equity could subject you to private mortgage insurance. (PMI) what is PMI?
Credit Score
Your credit score is one of the primary factors that a lender will look at to see if they will extend financing to you. Your credit score is near the top of your mortgage refinance checklist for this reason. Lenders have tightened lending standards in response to the economic impact of the Coronavirus. Standards are mirroring those seen after the 2008 financial crisis. Most lenders will want to see a score of at least 760 in order to write a mortgage with the most favorable rates. A lower rate may qualify you but expect to receive a less than ideal interest rate.
Debt to Income Ratio
Just as lenders have tightened their standards from a credit score perspective, so to have they tightened their lending standards when it comes to your debt to income ratio. Most lenders do not want to write a loan that has a monthly payment that is more than 28% of your gross monthly income. Your overall debt to income ratio should not be above 36%. Paying off other debts and increasing income can help your ratio and your chances at qualifying.
Points
Many loans charge points on loans. Points are equal to 1% of the overall mortgage loan amount and are paid at closing to bring the interest rate down. Be sure to calculate the total that you will pay in points, since these will be wrapped into the principal of your new loan or paid at closing. Here is a link explaining mortgage points: how do mortgage points work?
Is a Refinance Worth it?
A key factor on your mortgage refinance checklist should be whether a refinance is worth the cost. Refinancing a loan involves closing costs and other fees. You have to remain in your home for a certain length of time before you break even. Assume that refinancing your current loan cost you $1000 in closing fees. You are now saving $50 a month from your original mortgage. Recouping your costs will take 20 months in this scenario. If you plan on moving before this, then a refinance may not make sense. mortgage refinance calculator
Taxes
While I feel that taxes are not a make or break factor in a mortgage refinance checklist it is still important to make note of them. If you deduct mortgage interest on your taxes, then a refinance could have an impact on the amount that you deduct, and in turn possibly increasing or decreasing taxes owed or a refund received. It is best to consult with a tax expert should this be a concern.
Conclusion
If you are thinking about refinancing your mortgage, then there are a few factors to consider before proceeding. Running through a mortgage refinance checklist can help you determine if a refinance is right for you.
Read Also:
Want to Refinance Your Mortgage? Lessons Learned from an Average Joe
5 Little Known Financial Secrets About Mortgage Loans
8 Types of Mortgages to Take Note Of: Which One Is the Best for Your Needs?
Pay Extra Or Refinance? That is the Question
Based in the Pittsburgh, PA area, Brian holds full-time employment as a Warehouse Manager for an electronics firm. Brian enjoys wealth building, investing, gardening and the great outdoors. Brian holds a B.A. in Environmental Studies from the University of Pittsburgh and an MBA from Robert Morris University.
