Six Things You Need to Know Before Refinancing Your Home Loan

by Jeremy

Something that almost all homeowners could agree on is that they would like to have lower mortgage rates. During these difficult times, many people are just trying to develop a way not to lose the home they worked so hard for.

Many people opt to refinance their mortgages as a means of lowering their monthly payments. It’s also a great way to knock some interest off your home loan. Even though refinancing your home is a great way to lower your mortgage rate, there are several things you need to know before hitting the reset button on your home loan.

Home Loan

1. You need to have equity in your home.

When you have a mortgage on your home, you and the lender co-own the home until you’ve paid the home loan’s total amount. However, every payment you’ve made on your home counts towards your equity in the home. Your home equity is your stake in your home. If you only have a little equity in your home, you may want to consider refinancing your home as it may not help you as much as you expect.

If you don’t have at least 20% equity in your home, then you’ll have to pay for private mortgage insurance (PMI). If you end up having to pay for PMI, then refinancing your home loan probably won’t lower your monthly payments.

2. Work on your credit.

It should come as no surprise that your credit score is a factor mortgage lender consider for refinancing loans. Your best chance of getting a lender to refinance your mortgage is to have excellent credit.

Rate adjustments aren’t compulsory, meaning that no one has to restructure your loan like there was no mandate to give you a home loan in the first place. Remember, the higher your credit score is, the better chance you will refinance your home loan.

3. Refinancing could raise your interest rates.

The most common reason for homeowners to seek to refinance their homes is rate adjustments. If you’ve been paying on your home for 10 years and refinance it for another 30 years, then you should see a significant drop in your mortgage payments. However, you’ll more than likely be paying a higher interest rate for the next 30 years.

4. You have to pay closing costs for refinancing.

Before you begin the process of refinancing your home loan, it’s important to know that you will have to pay closing costs. The rule of thumb is that your closing costs will be anywhere from 1% to 4% of the mortgage rate. You can either pay your closing costs up front or pay them with your monthly mortgage payments. If you roll your closing costs into your monthly payments, it will take longer for you to reap the benefits of refinancing your home loan.

5. You can shorten your mortgage term.

As mentioned before, most homeowners who refinance their homes are looking to lower their monthly payments. However, that’s not the only reason to refinance. You can also use refinancing as a way to shorten the term of your home loan. Shortening the term of your loan will help you to get debt-free faster and lower your interest rates. It’s important to note that shortening the term of your loan will increase your monthly payments.

6. You have to prove your ability to repay the refinanced home loan.

Lenders also consider your debt-to-income (DTI) ratio when deciding whether or not to refinance your home loan. Having excellent credit greatly helps you qualify, but lenders typically want to see you with a DTI of 36% or lower to show that you can manage your debt. A DTI of 36% means your monthly debt is equal to 36% of your income.

Refinancing your loan can be a good choice under the right circumstances, but it’s crucial to be well informed and prepared before making the call.

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