In recent years, mortgage interest rates have been relatively low. Thus, homeowners have increasingly leaned toward restructuring their finances. Refinancing a mortgage loan can be a complex and difficult process, but it’s important to know in case you decide to pursue this option.
Things To Know When Refinancing A Mortgage
It’s important to consider more than just interest rates when weighing whether to refinance a mortgage. Here is what you should know before beginning this process.
Know The Home’s Equity
Equity is perhaps the most fundamental qualification for refinancing your mortgage. Thankfully, home values in the United States have been steadily increasing and the percentage of underwater homeowners has decreased substantially. However, some homeowners maintain low equity. You should find out if you qualify for a federal program like Fannie Mae or Freddie Mac by visiting a bank or other lending institution and explaining your needs. According to Investopedia, homeowners who have 20% equity or more in their home are more likely to easily qualify for a new mortgage.
Check Your Credit Score
Many lenders have raised the minimum credit score required to be approved for a mortgage loan in recent years. Thus, you should ensure you have a strong credit history in order to qualify for a loan with low interest rates. In most cases, lending institutions will demand a credit score of at least 760. Prospective homeowners with lower scores can sometimes still qualify for a new loan but end up paying higher fees or interest rates.
Evaluate Your Debt-To-income Ratio
Typically, lenders will want to see a debt-to-income ratio equal to 36% or less. Aside from high income and savings and a stable employment history, this ratio can also determine whether or not you get approved for a mortgage. Therefore, you should pay off some debt before seeking to refinance your home. Lenders will also often seek to keep monthly housing payments under 28% of a borrower’s gross monthly income.
Understand The Costs Of Refinancing A Mortgage
Refinancing a home typically costs somewhere between 3% and 5% of the total sum of the loan. However, certain homeowners with enough equity sometimes resort to rolling these costs into their new mortgage to increase the principal. Certain lenders also offer a “no-cost” refinance, which typically entails a higher interest rate to cover any closing costs. Some of these fees can be negotiated in certain cases.
Comparing Rates Vs. Loan Term
It’s important to remember that an interest rate is not the only key aspect of a mortgage. The loan’s repayment terms (i.e., over what period of time it must be repaid and how much should be reimbursed monthly) should also be considered. If you’re simply seeking low interest rates, you should apply for a short-term loan. However, if you are also looking to minimize your monthly payments, you should pursue a long-term loan.
When weighing several mortgage offers, always make sure to note the interest rates and the refinancing points. These points, which equal 1% of the loan amount, are usually paid to lower the interest rate. These points are typically paid upon closing.
Know Your Break-Even Point
The break-even point is defined as the point at which your monthly savings have covered all refinancing costs. Once you’ve reached this point, you do not need to worry about saving more.
Hire A Title Company
A reputable home title company should be able to advise you on whether or not refinancing is a sound option for you given your financial situation, needs, and priorities. A title company can also inform you about whether or not you should acquire private mortgage insurance (or PMI). Typically, borrowers with less than 20% equity in their home must acquire PMI. Finally, you should also learn and understand how refinancing your mortgage affects your tax deductions (be informed of any local, state, or federal laws that apply).
Speak With The Experts For Refinancing A Mortgage
Speak to the experienced professionals at Mathis Title Company in Fairfax, Virginia, to learn more about the pros and cons of refinancing a mortgage loan. Mathis will help you substantially cut closing costs whenever possible. They will also help you negotiate mortgage contracts to ensure no legal issues arise during the refinancing process, including disputes or a loss of your rights as a borrower.
Mathis will also let you know whether you should switch to a fixed-rate mortgage or consolidate your credit with a home equity line of credit (HELOC), which often comes with an adjustable rate. Mathis will help you by providing services like ordering clean title searches, preparing closing documents, collaborating closely with your lender, and more. Contact Mathis Title Company today online to learn more.