There are some times when it can be wise to refinance a home loan. Refinancing involves obtaining a new mortgage loan with better terms to pay off an existing home loan with better interest rates, lower monthly payments, a shorter loan period, or access to home equity. But it also has closing costs and fees so you have to find out whether it is worth going through with it or not. This article gives the reader an idea of what factors one should look at while trying to establish when is the best time to refinance.
Interest Rates Thus, interest rates are one of the most important considerations in deciding to refinance a mortgage. If current interest rates are a full one percent below your current mortgage, refinancing could prove to be thousands of dollars for interest on the loans. Consider interest rate movements and expectations to look for good opportunities. For instance, if one has a fixed rate loan, and the rates are expected to rise in the near future, there is the possibility of refinancing before the rates rise. Bank interest rates are constantly changing and therefore when there is a shift downwards, one should move fast.
Equity And Loan-to-Value Ratio The longer you have lived in your home and the more equity you have built up and the lower loan to value ratio you have the better mortgage rate you are likely to get through refinancing. To the lenders, the borrowers with at least twenty percent home equity are categorized as low credit risks. However, if you are at the moment placing only ten to fifteen percent equity, it will be wiser for you to wait for some time and be able to meet the interest rate and costs of the loan. In a short span of time, the value of homes can grow through the roof, which in turn increases your equity. It is best to run the numbers from time to time to determine if refinancing is feasible.
Upfront Costs Thus, when determining the possibilities of saving money through refinancing, closing costs and fees should also be taken into consideration. The expenses involved in refinancing are between 2% to 5% of the total amount that you owe on your home. These include origin costs, application costs, title search, appraisal and so on. However, if your aim is to reduce the monthly payment, your breakeven horizon will likely be shorter because the costs are amortized over the long term. However, to achieve the benefits of lower interest rate, it may be several years before the cost of closing can be offset by the savings on interest charges. Mathematics will then dictate whether costs are outweighed by savings.
Credit Score It is a known fact that improved credit scores leads to better mortgage deals. So, pay attention to enhancing your credit scores before applying for this type of refinancing. Always be sure to pay all your bills on time, keep your credit utilization as low as possible and ensure errors in your credit report are corrected. For reasonable refi rates, you need at least a score of 720 or higher, but if you score 680, then you can opt for the program. Check your score half a year before the planned refinance and fix any problems if there are any. Each additional point can make a difference in the cost.
Time that you have been staying in your home Most of the companies that offer cash-out refinance state that the borrower must have lived in the house for about one to two years. But you can be eligible for a rate-and-term refinance without waiting. Evaluate your timeframe goals. If equity access is the core concern, meet the residency requirements first. If the emphasis is made on better rates or payments, it can be done earlier with refinancing. Moreover, the more time one spends in a particular location, the more assets can be accumulated for a better interest rate for the loan.
Income and Employment Fluctuations For a loan application to be approved lenders have to determine that they are able to repay the loan granted them by providing them with steady income and employment records. If you have recently switched jobs, then it is wise to refrain from refinancing until one is settled in that job, which could take anything between six months to one year. Application strength can also be weakened by job loss, cuts in hourly wages, and reduced self-employment revenue. Moreover, approaches to getting more than one stream of income will also boost your credit rating when it comes to borrowing. Coordinating a refi with income and job is wise.
Changes in expense and debt level The commonly used debt-to-income ratio, which is evaluated during mortgage underwriting, compares total monthly obligations to gross monthly income. If you have opened any new credits such as student loans, car loans, or credit cards within the last six months, it may be more advantageous to wait before you refinance to enhance your ratio. Reduce debts as much as possible in order to have a good ratio and be approved for a refi. Similarly, prepaying some of the debts will also help to achieve the best results in optimizing the outcomes.
Changes In Family Situation Life changes impact on financial position. Changes in life situations, such as marriage, divorce, birth of children, parental care or children’s college expenses may limit the amount of cash flow to cover the mortgage after refinancing. Prioritizing attending to any changes in your family and financial status first helps in repaying with confident about the ability to repay. You should also think of how soon you may require to use home equity for expenses such as education expenses.
Loan Term Remaining That means the longer remaining term of one’s current home loan, the more beneficial a refinance will be. Refinancing is less sensible close to maturity of mortgage because costs may surpass savings in terms of interest rates and payment durations for the few years remaining. In fact, most commentators suggest that it is advisable to refinance only when the current term is at least five years or longer. However, a refi can be allowed under three years if the objective of the process is to reduce interest rates or monthly payment obligations.
Refinancing requires analysis of specific situations concerning interest rates, the property’s value, credit rating, time constraints, debts, income, and the loan agreement. Although it may sound attractive when interest rates are low, refinancing is not always the right thing to do. In essence, it will help avoid rushing into the decision to re-finance your home loan through timing it based on your financial and personal circumstances. This will help to keep a check on the factors from time to time and figure out when the time is ripe.
