Life is constantly changing, so why shouldn’t your mortgage? Refinancing your home can be a great way to secure a lower interest rate or a mortgage that better reflects your needs. According to software, data, and analytics firm Black Knight, U.S. homeowners saved $14 billion by refinancing their mortgages in the 18 months since the COVID-19 pandemic began. This information might excite you, but here are a few things to consider before you rush to refinance.
Your Home’s Equity
It’s only worth refinancing your home if it is worth more than its purchase price. Homes with depreciated value are in negative equity. Ideally, lenders want you to have at least 20% equity in your home. According to CoreLogic, borrowers gained more than $3.2 trillion in equity in 2021, so negative equity isn’t a top concern for most people. However, if you’re one of the 2.1% of homeowners whose home has decreased in value, you may need to stick with your current mortgage until your local real estate market improves.
Your Credit Score
Lenders look for borrowers with credit scores of at least 760. If your credit score is lower, you may find securing a new loan more difficult. Generally, you’ll likely pay higher interest rates if someone does offer you a loan. If your credit score is low, it’s more financially savvy to improve it before lodging your refinancing application.
Your Debt-to-Income Ratio
Your credit score is just one piece of the financial puzzle for lenders to assess. The remaining piece is your debt-to-income ratio. A debt-to-income ratio that is 36% or less will be enough to convince most lenders you can make your new mortgage repayments. Some lenders will consider your application if your debt-to-income ratio is 43% at the highest, but you’ll need to shop around. If your debts take up a sizable chunk of your income, you may want to pay them down before refinancing.
The Upfront Costs
Establishing a new mortgage typically costs between 3% and 6% of the loan amount. Some lenders can reduce the costs or fold them into the loan, but you should only consider refinancing if you can cover your loan. No-cost refinancing packages are tempting, but few things in life are free. You’ll typically pay those costs later in higher interest rates.
Your Financial Goals
Consider your financial goals before you meet your lender so they can help you find a new mortgage that meets your needs. Lenders may suggest a long-term loan because they’ll collect more interest over time. However, if you want to pay off your new loan fast, push for a mortgage with a shorter term to save you thousands in interest.
If you think refinancing is the right option for your mortgage, contact The Tuttle Group. Our refinancing experts can cut through the jargon and make the refinancing process so much easier. To learn more about how we can help you, schedule a meeting with one of our team members via our website or give us a call at 469-319-0660.
