Advertising disclosure: This article is published by Best Rate Loan LLC, a licensed Michigan mortgage broker (NMLS #2075205), and is advertising. It is not an independent review, ranking, or comparison, and it is not financial, tax, or legal advice. We have a financial interest in the products discussed. Information is general and for educational purposes only; it is not an offer of credit or a commitment to lend. Rates, programs and program terms change without notice.
Mortgage rates shift with the broader economy, and when they drop, it can be tempting to refinance. Is this the right choice for you? Should you refinance, or should you hold what you have?
The truth is that there’s no one-size-fits-all approach that will work here. Every situation is different. To determine the best path forward for you, it’s important to ask a few questions first.
Question 1: Why Do You Want to Refinance?
First, determine why you want to refinance your loan. Chances are good that it’s not the low interest rate itself that interests you – it’s the lower monthly mortgage payment. Even a couple of hundred dollars per month could mean a major difference in liquidity and may offer the financial breathing room you need.
However, don’t forget that you may not actually see much in the way of savings. That’s particularly true if you’re refinancing from an already-low interest rate to one that’s only nominally lower. While dropping a percentage point may be worth exploring if your goal is to lower your payment, cutting your rate by a tenth of a percent may not be worth it.
Another potential reason for refinancing a mortgage is that you’re shortening your payment term and want to pay your mortgage off sooner. Although this will more than likely increase your monthly payment in the short term, you’ll save a sizeable amount of money in interest and be that much closer to owning your home outright!
Question 2: What Documentation Do lenders Need?
Refinancing your mortgage is only superficially similar to taking out the initial mortgage. Your lender will require some pretty specific information to start processing the refinance, and every lender has different requirements and standards. To stand the best chance of being approved (and not wasting both your time and the lender’s), make sure that you measure up to the standards in place in the following areas:
- Equity: How much equity do you have in your home? lenders will require that you have paid off at least a specific amount of the existing mortgage (equity) before they will consider refinancing.
- Credit Score: What kind of shape is your credit score in? Most lenders will only offer the choicest refinancing interest rates to the most qualified borrowers. Check your lender’s minimum credit score before doing anything else.
- DTI: Your debt-to-income ratio is another important piece of the puzzle. Your lender will have a DTI range and you must fall within it to qualify to refinance your mortgage.
Question 3: What’s It Going to Cost You?
All loans come at a cost. Most borrowers are familiar with this in the form of interest payments (and the underlying reason for refinancing at a lower rate). However, there are other costs to consider. Refinancing a mortgage is just like taking out another loan, which means you have closing costs to deal with.
The average closing costs for Americans exceed $5,600, and that will erode some of your savings, particularly if you’re only going to stay in the home for a short time after refinancing. Find out what you’ll be looking at in terms of closing costs and check that it makes financial sense.
Question 4: Have You Ever Requested a Mortgage Forbearance?
Mortgage forbearance is a tool some homeowners lean on during a temporary financial hardship – a job loss, a medical event, or another disruption to income. However, it may turn out to be a double-edged sword if you’re thinking about refinancing your mortgage. Most lenders see a recent forbearance as a sign of increased risk, so a past forbearance on your file can affect your eligibility or pricing when you apply to refinance.
Question 5: How Will Refinancing Affect Your Payments?
While the obvious answer to the question above is “to lower them”, that’s not always the case. The thing is that there are multiple mortgage refinancing options. The one you choose will affect your monthly payment in different ways. For instance, if you refinance with the same term but a lower rate, you’ll get a lower monthly payment. However, if the term changes, so will the payment amount – a longer term may mean an even lower payment per month but more interest over the life of the loan, even at a lower rate.
How do you choose the right option for your needs? It’s important to work with a reputable mortgage broker who can guide you through the refinancing process and help you find the right solution for your needs, goals, and budget. Contact Best Rate Loan to learn more about your options.
This article is general educational information, not advice, and not an offer of credit or a commitment to lend. Mortgage rates, loan programs, down payment assistance program terms, and tax rules change frequently, and the information here reflects our understanding as of the last review date shown above. Verify current program terms with a licensed mortgage loan originator before making a decision. Best Rate Loan LLC does not provide tax, legal or accounting advice.
