Refinancing your mortgage can provide some big benefits – a lower monthly payment, access to cash for home renovation projects and the potential to pay off your home loan faster.
But, like any major financial decision, it requires planning.
Going into a refinance without doing your homework will make the process more stressful and potentially more expensive. Ask yourself these three questions before you take on a new mortgage loan.
Does it Make Sense for Me Financially?
There’s more than one reason a refinance might be beneficial.
Some want to get a lower interest rate while the market’s down to generate a lower monthly payment. Others might want a cash-out mortgage that allows them to borrow money against their home’s equity for remodeling projects, tuition costs or other expenses.
Refinancing also allows you to switch from an Adjustable Rate Mortgage (ARM) to a fixed-rate loan; this way, your interest rates won’t change and you’ll have a consistent monthly payment. Maybe you want to pay your loan off faster. In this case, you can refinance to shorten your loan term.
Ask yourself what makes most sense for you. Given the handful of reasons you might be looking to change out home loans, consider the following:
- If you want to refinance for a lower rate, crunch the numbers to see what your “break-even” point is. Refinancing requires you to cover closing costs that can amount to approximately 2% of your mortgage. How long will it take you to “break even” or recoup those costs given your new monthly payment? Look for a refinance deal that allows you to regain your closing costs in five years or less.
- A cash-out refinance can be a great way to get money for a home renovation project or consolidate debt. A cash-out refinance lets you borrow up to 80% of your home’s appraised value. This means you’ll walk away from closing with a check, but you’ll also have a higher mortgage payment in some cases.
- Try to avoid a refinance that unnecessarily lengthens your loan term. A lower rate, for example, might not be worth if it adds 10-15 years to your mortgage.
Do I Qualify?
Refinancing your mortgage requires much of the same preparation needed in an initial home loan application.
Borrowers need to have a good credit score and be able to cover refinancing closing costs. The lower your credit score is, the less likely it is you’ll be able to get a better interest rate. The amount of equity you have in your home also plays a role. Generally, lenders will look for you to have at least 20% equity in order to refinance.
Consider your Loan-to-value ratio (LTV), too. If you have a higher LTV, that means you owe more on your mortgage and pose greater risk to lenders.
Lenders will look at your monthly income statements and Debt-to-income ratio to ensure you’ll be able to make payments on time.
Have I Done My Research?
The ins and outs of the banking industry aren’t common knowledge. Don’t be discouraged if you find yourself confused or overwhelmed by the refinance process.
Shop around for the best refinance program and work with financial institutions that make you feel comfortable.
Make sure you’re comfortable with the process and understand why you’re considering a refinance. You’ll be more likely to close a beneficial refinance deal if you’re diligent in asking questions, comparing lenders and programs and seeking help when you need it.
Still have questions? Contact a Sunrise Banks mortgage officer.