You may be tempted with all of the advertisements directed toward you, Joe Homeowner, to take advantage of the historically low interest rates in our current economy. Refinancing your home could provide some benefits to you short and long-term, however consider these five questions to ask your loan officer before deciding to move forward.
What is Your FICO Score?
Before you make any major financial move, know how you are viewed in the eyes of lenders. If it has been a few years since you have applied for a mortgage, you may be surprised that requirements have tightened, and in some cases, more documentation is needed to obtain the same loan you received with ease before. For some of the very best and lowest rates on mortgages, you need to be well above a 720 FICO score. If you are below that mark, you may still get approved, however expect to pay more now (via closing costs) or later (via your interest rate).
What is Your Debt To Income Ratio? (DTI)
As an existing homeowner, you may have the assumption that refinancing will be a breeze. For some it is, however if you have taken on additional debt since purchasing your current home, your debt to income ratio may look considerably different. As a general rule, many lenders like to see your overall debt to income ratio to be 36% of your gross monthly income.
Suzy makes $60,000 per year at her employer, which comes out to being $5,000 per month. Her current total monthly debts (mortgage included) is $1,900. Her overall debt to income ratio is 38%. While she is over the 36% mark listed above, she could potentially still be approved for a refinance given other compensating factors in underwriting.
How Much Will It Cost You?
Closing costs for refinancing your home can cost up to 5% of your total loan amount, however there are ways you can potentially absorb that into the new loan, if you have sufficient equity. There are a few lenders who also offer qualified customers a no-cost refinance, in which you will be charged a higher interest rate to absorb the closing costs.
Will Refinancing Eliminate Private Mortgage Insurance (PMI) ?
If you purchased your home within the past couple years, or had a very small down payment, then odds are you are currently paying PMI on your current loan. Many borrowers opt to refinance to eliminate this charge, assuming that they now have greater than 20% equity. During your initial consultation with a loan officer, you should be briefed on if that will be a defined benefit of this process.
Why Are You Doing This?
- There are many reasons why people refinance, such as:
- Lower their monthly payment,
- Take out equity for home improvements, debt consolidation, or other major purchases,
- Remove someone from the original mortgage
- Eliminate PMI
- Reduce the total years on their loan
No matter which is your motivation, make sure you have two to three compelling reasons why a refinance makes sense for you. You do not have to refinance with your existing bank or mortgage lender, although many existing mortgage holders will give credit towards closing costs or rate reduction to retain customers. You should have two to three quotes from lenders, including your existing company, and make a decision based off the one you feel most comfortable with.