Factors to Be Aware of Before You Decide to Have Your Home Refinanced
There’s a lot to consider before taking that step to refinance your home. According to Winnie Sun, a financial advisor, a majority of homeowners tend to focus on home appreciation and interest rates when contemplating taking this option.
In fact, if the value of your house has soared exponentially, but still has relatively high-interest rates from the first time that you moved in, it would be wise for you to not refinance.
However, Sun says that there are other individuals who will see this opportunity as an opportunity to redirect some of the cash as part of their budget. However, Sun advises that before taking that step, one should contemplate whether or not it is the wisest step to take.
As initially stated, there are quite a number of factors that need to be considered before an individual takes that step to refinance their mortgage. Here are some of the most important factors.
The first qualification that an individual will need to address is whether they have equity in their home. The silver lining is that the value of houses has been on the rise lately, with the number of underwater homeowners rapidly decreasing.
That being said, not all homes have gotten to their value, thus leaving some owners with relatively low equity.
The main problem with refinancing having no equity (or very little of it) is that it is not always a reality when dealing with conventional lenders, however, some government programs have been started to cater to this.
That being said, homeowners having a minimum of 20% equity stand a higher chance of qualifying for a loan.
In recent years, a majority of lenders have been more stringent with their loan approvals, leaving some consumers utterly surprised when they discover that they are not eligible to qualify for low-interest rates, despite having relatively great credit.
Nowadays, the most common lenders around like potential loaners to have a credit score higher than 760 to be eligible for low mortgage interest rates.
That being said, borrowers with low credit scores might still obtain a new loan, but with much higher fees.
If you have once gotten a mortgage loan, or currently have one, you might assume that it can be simpler for you to apply and easily get a new one, right?
In fact, lenders have also become more stringent with debt to income ratios as they have been with credit scores. Even though factors such as substantial savings, a stable job history, and a high income play a vital role, most lenders are looking to keep monthly housing payments below 28% of the gross income that you rake in every month.
Indeed, this would mean that your average debt to income should be about 36% or favorably less, although there are some lenders out there who are willing to parlay at 43%
In most cases, refinancing a home costs about 5% of the total loan amount. However, you as a borrower can find smart ways of minimizing this cost, and potentially wrapping them as part of the loan.
Additionally, if you have good equity, then you can have the costs rolled over into your new loan, thus increasing its principal.
In some cases, other lenders normally provide a ‘zero cost’ refinance loan, which simply translates to you having to pay higher interest to cover the costs.
When you are searching for a variety of mortgage options and offers, it is important that you analyze both rates, as well as points. In most cases, points are equated to 1% of the total loan amount that you have, and are normally paid to minimize the interest rate.
To make things much easier for you, make sure you calculate the total amount that you will pay in terms of points for each of these loans, because most of these will be part of the principal of the new loan that you will get.
Private Mortgage Insurance (PMI)
One of the benefits of having a 20% or higher equity when refinancing is that it protects you from paying a PMI. However, for those under 20%, they will have to pay a PMI together with their current loan.
Unfortunately, some homeowners paying a PMI have had their homes record significant decreases in terms of values for having to pay PMI. Hence to be on the safe side, it is advisable to get a financial analysts opinion on whether to pay PMI when refinancing or not.
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