Mortgage refinance is an option that can be worth it if the time is right. Refinancing can be a good choice if you’re prepared to pay a higher monthly payment or need better and lower interest while rebuilding your credit. The key thing to note is that everyone’s situation is different, and there’s no single right answer. A few basic considerations, though, could help you make a more informed decision.
Consider Your Home’s Equity
To determine whether it’s advantageous to refinance your mortgage, you should first figure out how much equity you have in your home. If you’re in negative equity—that is, if your house is worth less than your mortgage balance—then refinancing probably isn’t the best idea for you.
Check Your Credit Score
In recent years, lenders have become more selective, so it may take a little longer to get qualified for the best mortgage interest rates. Typically, to qualify for the lowest rates, you need a credit score of at least 760. Below that, you will still be able to get a mortgage, but lenders may charge higher interest rates or fees.
Evaluate Your Debt-To-Income Ratio
If you have a current mortgage, you may think that getting another one will be a snap. However, lenders have raised the bar for credit scores and sometimes ask for lower debt-to-income ratios. Qualifying will depend on whether you have a lot of money in the bank, a good or steady job history, and so on. Lenders might want to see the monthly payments on your new loan stay under 28% of your gross income.
Know Refinancing Costs
When you refinance a mortgage, closing costs between 3% and 6% of the total loan amount are standard. Before choosing a lender, shop around for the best deal on fees. You might be able to negotiate them or even have them rolled into the loan principal. Some lenders offer “no-cost” refinances, which usually mean higher interest rates that make up for the lack of closing costs.
Know the Difference Between Term and Rates
When you’re refinancing a home loan, it’s important to decide what you’re looking for from your mortgage product. If you wish to have the lowest possible monthly payments for as long as possible, a low interest rate for a longer term will be the right choice.
