With so many monetary factors currently in flux one thing has remained consistent and evident during the pandemic: U.S. homeowners are refinancing in record numbers.
Mortgage refinancing is up by 98% from November 2019 to November 2020, with the average mortgage refinance total being $291,000 according to the Mortgage Bankers Association (MBA).
While refinancing is as tempting as ever it is imperative you do your research and plan accordingly. Below are 3 important questions to consider before submitting your refinance application.
- How do I qualify for a refinance?
- What is my chief objective?
- Is this objective attainable?
1. How do I qualify for a refinance?
All lenders carry their own requirements that you need to meet in order to qualify for a refinance. Ask your lender what requirements you need to meet in these areas:
- Debt-to-income (DTI) ratio: Your DTI is a percentage that signifies to your lender the amount of your funds that go to basic, recurring expenses. The higher the DTI the less ideal. Your lender can demonstrate how to calculate your DTI and let you know the maximum DTI you need by loan type.
- Credit score: Your credit score is a three-digit number that represents your experience managing credit and loans. Your lender can present whatever loan options are available based on your score.
- Home equity: Your home equity is the percentage of your loan principal that you’ve paid off. Typically lenders require that you have some equity in your home prior to refinancing. Your lender can tell you how to figure out your current home equity in addition to the equity you need to qualify for a refinance.
“When refinancing you pay a large amount in closing costs. It would be wise to keep the loan until the savings surpass those costs. That may take a couple years. ”
2. What is my chief objective?
What do you wish to achieve by refinancing? Recognizing your objective after knowing the requirements is the most important step as it directs you to the refinance loan in line with your needs.
To lower my interest. When you refinance your 30-year mortgage you may consider doing so into a shorter-term loan. Monthly payments will most likely be greater, but you’ll pay a smaller amount of interest throughout the life of the loan.
To lessen my monthly payment. For this common refinance objective, apply for a loan of the same term. Most people have 30-year fixed rate loans and can lower monthly payments by refinancing while rates are low.
To acquire funds. A cash-out refinance permits you to borrow more money than you owe and take the difference out in cash. It’s most typically used to pay for home renovations.
3. Is this objective attainable?
Once you’ve identified your objective ask yourself if it’s realistically attainable.
If my objective is to pay less interest will the long-term savings be worth the larger monthly payment?
Your monthly payment will almost certainly be higher when cutting the loan term in half. In case of financial emergency will you be able to afford the monthly payment?
If you are unsure of the answer, it may be best to refinance for the same term as your current mortgage. You may not save quite as much on the whole, but will save regardless and still be comfortable when money is tight.
If my objective is to make smaller payments every month how much longer will I be living in my home?
This is of import because when refinancing, you will end up losing money if you sell your property before reaching the break-even point.
When refinancing you pay a large amount in closing costs. It would be wise to keep the loan until the savings surpass those costs. That may take a couple years.
If my objective is to obtain cash do I have sufficient equity in the home?
Typically you will be able to borrow up to 80% of your home’s value.
Ask your lender or check a recent statement to determine how much you currently owe on the mortgage. You should be able to cash out the difference amongst what you owe and 80% of the home’s worth.
Moreover, comparison shopping is vital in finding the best rates when refinancing. SELFi.com provides 100% accurate rates in real-time. Good luck in your refinance adventure and happy hunting!
The increase in conforming loan limits provides an opportunity to better your financial situation with a refinance.
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