Mortgage refinancing can be a great way to lower your interest rate and save some money on a home loan. However, it may not be the right option for every homeowner.
The decision to refinance your mortgage shouldn’t be taken on a whim. These are a few things you should consider before refinancing your home loan.
The Value Of Your Home
Mortgage refinancing may be a good idea if the value of your home has increased over time, but not if it is the same or has decreased. The loan-to-value ratio shouldn’t exceed 80% in order for you to refinance your mortgage.
If your property’s value has decreased, your loan-to-value ratio will be higher, and you may not even qualify for a new loan, or you would be required to make up for the difference in the ratio with cash. In both cases, it doesn’t make sense to refinance your mortgage.
Your Debt-To-Income Ratio
Your debt-to-income ratio should ideally be less than 43% to get a good rate on mortgage refinancing. If you have a lower income or a high amount of debt (possibly from many different sources), it’s not worth refinancing your home loan. Consider repaying some of your debt before applying for mortgage refinancing if you really want to take advantage of market conditions.
Your Credit Score
Like any other loan, your credit score also plays a significant role in mortgage refinancing. The good news is that the credit score requirements for refinancing are usually lower than those for initial mortgage loans. Having said that, the higher your credit score, the better interest rate you would get for your refinancing loan.
The Cost Of Refinancing
Mortgage refinancing comes with a cost, which can be anywhere from 3% to 6% of your loan amount. While you may be able to roll this cost into the new loan, you would still have to pay it.
There are some lenders that offer ‘no-cost’ mortgage refinancing. They may not charge you an extra refinancing cost, but these ‘no-cost’ refinance loans come at higher interest rates. No matter what refinancing option you choose, you will pay a little extra on the new home loan.
How Long Do You Plan to Stay In The Home
The 3% to 6% of the closing cost you pay on mortgage refinancing isn’t worth it if you aren’t planning to stay in the home for a considerable period. If you’re looking to move in a little while, you may end up spending more on the mortgage than saving money through refinancing. Recouping the closing cost of mortgage refinancing can take several years, so make sure you consider it before getting a new loan.
Final Notes
Mortgage refinancing may seem like an appealing option. While it sure is, it is not suitable for every homeowner. There are multiple factors that homeowners need to consider when determining whether to refinance their mortgage or not.
Make sure you do your homework before applying for a refinancing loan to make sure you’re doing the right thing. Talk to a reliable mortgage broker if you aren’t sure what the right decision would be for you.