Mortgage refinancing may sound convincing since lenders and government bodies advertise it often. However, that should not be the only standard for making a decision. It is advisable to analyze the offer for your peculiar situation. Besides, you may find out that it is not worth it. Hence, we have itemized some essential considerations before you grab the offer.
1. Clarify your Credit Rating
Lenders take a cursory look at your credit timeline, current income, and your debt position before settling on a rate. Generally, if your credit rating is too low, you may not qualify for competitive refinancing prices. However, you may compare different partners for lower lending rates.
2. Understand the Current Value of Your Home
Before you can refinance your mortgage, you need to have some realized equity on the building. Besides, home values are constantly changing with the prevailing economic situation. If your house has zero or minimal equity, you might not qualify for refinancing. Meanwhile, a 20% equity gives you a good starting point.
3. Crosscheck the Repayment Duration
There are three major mortgage repayment plans, covering 10, 15, and 30 years. With the first option, you pay a higher monthly due and smaller interest over a reduced period. That way, you can become debt-free quickly. Meanwhile, with the last option, you have the smallest monthly payment. However, over the long term, the interest amount becomes substantial.
4. Find Out the Breakeven Period
Concerning mortgage refinancing, your breakeven period is the duration it takes to recoup your upfront investment. Once you reach the breakeven point, your monthly savings is all yours. For instance, if it takes 24 months of saving $150 to cover closing costs of $3600, it confines you to the house until the time expires. Therefore, check if your current budget can accommodate it.
5. Identify the Insurance Policy on Your Mortgage
If you pay over 20% of your original mortgage fees, you are free from private mortgage insurance (PMI). However, it is mandatory for anyone paying lesser equity. Also, if your home value reduced before refinancing, PMI becomes unavoidable. If your current mortgage includes insurance, it will have little effect on you. Thus, check with your lender whether your refinancing eliminates PMI or not.
6. Negotiate Better Closing Costs
You can expect to pay closing costs between 2 and 6 percent of the mortgage. If you are financially buoyant, you can pay the upfront fees immediately. However, if you are cash-strapped, you can incorporate it into the new mortgage. In some situations, lenders either bear the cost of mortgage refinancing or reduce it substantially. Therefore, endeavor to strike a better deal.
7. Know the Percentage of Your Income That Services Debt
The debt-to-income ratio (DTI for short) refers to the percentage of your total monthly income that services your debts. The majority of lenders would prefer your DTI is under 30%. Besides, the higher your DTI, the smaller your disposable income. Moreover, if you have other debts asides from your mortgage, it becomes more challenging to qualify for refinancing. Consider offsetting some debts to increase your disposable income.
8. Understand Your Tax Policy
Some homeowners deflate their income tax value by deducting the interest on their mortgage. Refinancing may allow you to pay even a lower amount. However, you should expect to pay higher interest in the initial years only, after which it reduces drastically. Besides, if you incorporate the closing fees into the principal, your tax deduction will increase.
As highlighted above, mortgage refinancing is not a walk in the park. Conduct a thorough analysis to ascertain its suitability for you. Moreover, you can consult lenders for holistic answers to your concerns. If you choose to go ahead with it, the points discussed above will be of help.