The Lowdown on Refinancing
Mortgage refinancing is bane or boon. It could either make you or break you depending on how you make of it.
In simple terms, refinancing is asking a lender to reconstruct your existing mortgage terms to obtain a more favorable one. While you get to have new mortgage terms, your original loan is also paid off in the process as per Zillow.
When Refinancing Makes Sense
The first step in refinancing your current mortgage is not the application per se. First and foremost, you need to ask yourself if creating a new mortgage term will actually benefit you, in the first place.
One of the advantages of refinancing according to Mortgagecalculator.org is that it allows you to bargain for lower rates. In order for you to qualify for a better loan rate, you must have better credit rating or an increase in your income.
Second, refinancing also makes sense if you could get cash out of the new deal that can be used for home improvements, buying a new car or other investments. The lender will assess how much money they are willing to lend you, and then pay off the balance from the original mortgage and give you the remaining loan amount through a cash-out.
Refinancing is also worth your time if you could get a better deal out of the new mortgage term as compared to that of the original loan. There are two options available for you: first, you can ask to pay the loan in less time by paying a higher amount of money every month, or you can ask to pay less money monthly by paying the loan for a longer period of time.
Check Your Loan to Value Ratio
Zillow recommends checking out your home value and the amount of debt you still owe from your original mortgage as reported by the Realty Times. This is referred to as the loan to value or LTV ratio. Simply, divide the loan amount with the home value and multiply with 100 to get your LTV ratio in percentage. The magic number here is 78%. If you're LTV is less than that, you are more likely to qualify for refinancing without paying for a private mortgage insurance.
Know Your Debt-To-Income Ratio
It is important to know whether you are, indeed, capable of refinancing. Lenders also take this into account by weighing in on your income, and refinancing expenses and other existing debts via debt-to-income ratio, notes the Lending Tree.
Get your debt-to-income ratio by dividing your mortgage and other debt payments with your total income; the lower the value the better. Today, 43 percent is the ceiling for one to be eligible for mortgage loans.
Refinancing Checklist
The LendingTree came up with this list of questions you should ask yourself beforehand when considering refinancing.
1. Is there a surge in interest rates?
2. Is your credit rating getting better?
3. Is your home equity higher?
4. Are you getting higher income?
5. Is there a need for cash to make a major but useful purchase?
Now, If your answer is an affirmative to at least one of these questions, then it might just be the right time for you to refinance.
