With interest rates low, more and more borrowers are looking to refinance to lower their current interest rate and mortgage payment. However, even with mortgage interest rates being low, it all depends on your individual circumstance if it is right for you. These are 6 key components to consider when refinancing.
Having equity in your home can determine which home loan is best for you. Home values have been on the rise in the last year so a lot of people are gaining equity quickly. But there are still homeowners who have not regained their home value or have little equity. This can cause refinancing to not be an option with conventional lenders. There are different programs through the government that can be available for borrowers with little to no equity. Homeowners with at least 20% equity will have an easier time refinancing and qualifying for a new loan.
A lot of lenders have made their qualifications stricter for loan approvals in the last few years. Credit scores have been one of the main factors that lenders are cracking down on and borrowers with a good credit score are finding they don’t always qualify for the lowest interest rates. Lenders look for borrowers with at least 760 or higher in order to qualify for a low interest rate. If you have lower than a 760 credit score, you can qualify for the loan but may not have the lowest rate
Not only are lenders being strict with credit scores, debt-to-income ratio can prevent borrowers from refinancing. Lenders typically want to keep housing payments under 28% of borrowers gross monthly income. There is some flexibility with the number so the maximum that lenders typically focus on is 36% or less. Factors like a long, stable job history or a high income could help with the amount you get pre-approved for.
There are several ways to reduce the costs of refinancing your home loan. You typically can roll the costs into the loan if you have enough equity in the home. There are lenders that offer a no-cost refinance but those costs can result in a higher interest rate. Shopping around can help reduce up-front costs.
Do not just focus on the interest rates when refinancing a loan. It is more important to establish when you want to pay off the loan rather than month to month expenses. If you want to reduce your monthly expenses, focus on the interest rates. If you want to pay less interest in the shortest time, focus on the term of the loan. Compare your options of a 15 year to a 30 year loan.
Mortgage interest rates and points are the two main things you want to pay attention to when you are shopping multiple lenders. Points are equal to 1% of the loan amount and are paid to bring down the interest rate. These points are paid out at closing or it will be wrapped into the principal of the new loan.
Lower interest rates and low margins with no lender or origination fees.