Owing to the record-low mortgage rates, refinancing your mortgage may seem a lucrative option to many homeowners right now. Interest rates are hovering near all-time lows due to the outbreak of Coronavirus. The pandemic has affected pretty much all parts of the economy including the housing market.
Borrowers with good credit history want to benefit from the lower fixed interest rates. To clarify, refinancing your mortgage is not always the right choice for an individual. There are four things you should consider when refinancing.
4 Things to Know Before You Refinance Your Mortgage
Low mortgage rates should not alone influence your decision to refinance. It is not always the right move for every individual since it involves paying off the existing loan and replacing it with a new one.
Know the Home’s Equity
Evaluate the current value of the home to know if the mortgage is eligible for refinancing or not. Before applying for a refinance loan, check your current home equity and loan-to-value (LTV) ratio.
Additionally, the LTV should also be at least 80% for refinancing. Reconsider this decision if you do not already own 20% or more of the total home’s equity. If the home has not regained value or you are refinancing with less equity, you may have to pay high-interest rates or private mortgage insurance (PMI).
Credit Score
In short, the better the credit score, the easier it would be to refinance your loan. An individual has to meet the lender’s mortgage borrowing requirements to take out a new loan.
It requires the borrower to have a credit score of at least 620 and a debt-to-income ratio of 36% or less. Refinancing mortgages will be more favorable with better interest rates if the credit score is above 760.
If you have a credit score below the aforementioned threshold, hold off reapplying until you boost your credit score or pay off debt.
Cost of Refinancing
Refinancing a mortgage usually costs 3% to 6% of the principal amount. You can also opt for a “no-cost” refinance with slightly higher interest rates to cover the closing costs.
Besides enjoying low-interest rates, many borrowers deduct the mortgage interest amount from their federal tax bills.
Interest Rates
Most importantly, many borrowers apply for a new mortgage for low-interest rates. Establish your goals or refinancing requirements, for instance, you may want a loan with the lowest interest rate for the longest time or vice versa.
If the interest rates have dropped or your financial situation has significantly improved, the chances are high that you will get a loan on favorable terms. Also, there is no point in refinancing a loan if the interest rates are higher. Each year, interest rates change depending on the market.
In Conclusion
Low mortgage rates due to the pandemic have sparked a refinancing boom. Many homeowners are leveraging this opportunity to save money. However, mortgage refinancing is complex and not always the right move. A borrower has to reconsider his overall financial situation before taking the next big step.
