Is a new home mortgage in your future? That really depends on your unique financial situation and the short and long-term financial goals you’ve set for yourself and your family. However, there are at least 4 key questions that you should consider before refinancing.
Why Should I Refinance?
Ask someone why they want to refinance their mortgage and you’ll likely receive an array of different answers. For many, the obvious answer will be today’s low mortgage rates – and for good reason. These rates have the potential to save you thousands of dollars over the life of your loan. However, it’s important to understand exactly how this aligns with your financial objectives. Is it to lower your monthly mortgage payment? Is it to move on from an adjustable rate mortgage in order to lock into a fixed-rate mortgage? Or is it to consolidate debts or borrow cash from the equity you’ve built? Regardless, just be sure a refinanced mortgage will meet your financial needs.
How Much Can I Save by Refinancing?
If your goal is to lower your monthly payment, you can easily achieve this with today’s rates. (This largely depends on whether you plan on staying in your home – but more on that later.) With a 30-year mortgage, you will generally pay more interest on a higher rate over the life of the loan in exchange for lower monthly payments. In contrast, a 15-year mortgage usually yields higher monthly payments in the short-term, but with a much faster payoff date, plus bigger savings on a lower interest rate. If you want a better idea of what your monthly payments may look like, you can check out our refinance calculator.
Am I Qualified for Refinancing?
If you’re serious about refinancing your mortgage, it’s important to know if you’re qualified. Your credit score is an important factor in your loan consideration. It will be reviewed by your lender to make sure you’re current on your debt payments and to confirm that your credit is in good standing. You can request a free credit report and check it for accuracy to report any errors.
It’s also important that your income has not decreased significantly since your previous mortgage so that your monthly payments fit your budget. Your debt-to-income (DTI) ratio (your monthly debt payments divided by your gross monthly income) will go a long way in determining a loan you can afford.
Equity will also play a role in your loan qualification. For those needing a refresher on equity, it’s the difference between your loan’s current balance and your property’s appraised value. So, if your loan balance is $140,000 and your property value is $400,000, your equity would be $260,000. Lenders can use another equity-related equation to determine your loan-to-value (LTV) ratio, which can impact your loan terms, APR and more. Your LTV is your loan balance divided by your property’s appraised value expressed as a percentage. Based on the figures above, your LTV would be 35%.
Is It Worth It?
For refinancing to be truly rewarding, it really comes down to one question, “how long will it take for refinancing to pay for itself?” If you plan on moving, you may not be able to recoup your closing costs (generally 2% to 5% of the mortgage balance). However, if you can live in your home well beyond the break-even period (the number of months it will take to recoup your closing costs), a mortgage refinance might pay off for you big in the end.
Have questions about refinancing? New American Funding can help you crunch the numbers and get you started on the road to your dream home today.