Thinking of Refinancing? What You Should Know

Refinancing your home today is not like it used to be. Even though interest rates are at rock-bottom lows, refinancing isn’t necessarily a good deal and even if it is, you might not qualify. According to Anthony Hseih, founder and CEO of loanDepot.com, “Homeowners today need to be triathletes to qualify for a loan, with great income, great credit and great value in their home.” Before you start shopping around for a lender, here is what you need to know.

First, what is your credit score? If it is above 720, great! You are one step closer to qualifying for today’s low interest rates. If however, your score is lower than 620 it will be difficult or impossible to be approved.

Second, take a look at your home’s equity. If you are like many Americans today you may have an underwater mortgage, meaning that you owe more on your current mortgage than what your home is worth. If this is you, qualifying for a traditional refinance is out. However, there are special FHA lending programs that you may qualify for that are worth checking out.

If you are not underwater on your mortgage, do you have 20% equity in your home? If so, you are in a good position to refinance. If you do not have 20% in your home, you will have to pay a monthly private mortgage insurance or PMI premium. This might wipe out the potential savings of refinancing.

Third, how long will you be in your current home? If you said 5 years or more, then refinancing is probably a good move. If however you said maybe a year or two, you should think twice about refinancing. The cost to refinance is generally around 3% – 5% of the loan. You will want to find out your break-even date to determine if refinancing will be worth it.

Next, determine your financial goals. In other words, are you looking to lower your monthly payment or shorten the length of your loan? Many are opting for option two and refinancing into 15 or 10 year loans. While the payment might be slightly higher, the savings in interest can be more than worth it.

Finally, look at special circumstances. Do you have an adjustable rate mortgage, an interest only mortgage, a second mortgage or a line of credit? All of these factor into whether or not mortgage refinancing is right for you.




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One Response to “Thinking of Refinancing? What You Should Know”

  1. Carl D responded on 25 Oct 2010 at 12:36 pm #

    If you are refinancing again, it would probably make the most sense to refinance into a shorter term loan if you can afford the higher payments. Or you could just pay more toward the principal on the loan you already have and save the refinancing cost.

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