Millions of American families will choose to refinance their mortgage every year. By choosing to refinance your mortgage, you can potentially get a large cash payment, lower your monthly mortgage payment, secure a lower interest rate, and enjoy many other benefits.
The mortgage market typically moves in cycles, meaning that sometimes rates will be going up and, sometimes, rates will be going down. Actions taken by the Federal Reserve and broader economic trends can both influence the direction that mortgage rates are moving.
But while conventional wisdom might tell you that when mortgage rates are low you should try to refinance, average rates are just one of many different variables you’ll need to consider. When deciding whether now is the right time to refinance, it is crucial to have a comprehensive overview of your entire financial situation.
So, if you are on the fence about whether now is the time to refinance,
be sure to keep the following details in mind:
So, if you are on the fence about whether now is the time to refinance, be sure to keep these following details in mind:
1. The Amount of Equity in Your Home
In the world of refinancing, equity—the portion of your home you actually own—leads to leverage. If you just bought a home last year, you probably won’t be able to get a lot of cash by refinancing (or even be able to make up the cost of refinancing). If you have been making mortgage payments and building for years, on the other hand, you will have considerably more options.
2. Changes in Your Credit Score
As was the case when you originally applied for your mortgage, lenders will look at your credit score when considering any terms for a possible refi. If your credit score has significantly decreased, then it is unlikely you will be able to get a better mortgage (though there are some exceptions). But if your score has gone up, you can expect to qualify for a lower interest rate.
3. Changes in Your Debt-to-Income Ratio
In addition to your credit score, lenders will also take a close look at your debt-to-income ratio. Ideally, you’ll want this ratio to be less than 36 percent. Paying off existing debts and finding ways to increase your household income (a raise, working an additional job, investment income, etc.) will cause your debt-to-income ratio to improve. But if you just lost your job, bought a new car, or otherwise caused your debt to increase, getting good terms will be much harder.
4. The Things You Can Change (and the Things You Can’t)
When applying to refinance your mortgage, there will be some things you can change and somethings you can’t. Usually, it’s not very productive to focus on things such as the Fed Funds Rate and other macroeconomic variables because these things are simply out of your hands. On the contrary, taking a look at your personal finances—and making adjustments accordingly—can help you qualify for better mortgage terms.
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5. Private Mortgage Insurance (PMI) Requirements
Private Mortgage Insurance (PMI) is usually required for conventional borrowers that have less than 20 percent equity paid into their home. Thanks to PMI, borrowers can now borrow for conventional mortgages with a five percent down payment, or possibly even less. If your refinance will cause you to fall below the 20 percent cutoff, you can expect to begin paying PMI on a monthly basis (usually about 8 percent of your mortgage payment).
6. Calculating your Breakeven Point
Refinancing is not free—in fact, according to one recent study, the average cost to refinance is about $4,500 in the United States. This means that in order for the entire refinancing process to be “worth it”, you should at least be getting enough out of the deal to offset these initial costs. Your mortgage lender will help explain how to calculate possible breakeven points and adjust your refinancing strategy appropriately.
7. Taxes (and Tax Deductions) Related to Refinancing
The taxes you will need to pay while refinancing, if any, will vary by state—be sure to see if there are any additional expenses you are currently overlooking. However, when refinancing, you might also be able to qualify for some additional tax deductions next year, such as the deduction of interest rates.
8. The Total Cost of Refinancing
The $4,500 figure quoted above represents the financial cost of refinancing but it’s also important to realize there are other costs involved as well—namely, time and possibly stress. The refinancing process is typically much smoother than the initial mortgage application process but there are still a lot of moving pieces involved. Be sure to think about the total cost and not just dollars and sense.
More tell-tell signs that you are ready...
Is it time to refinance your mortgage? Well, the answer to that question is going to depend on a variety of different variables. You’ll want to think about a lot more than just the interest rates that are currently available.
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