What to Know About Refinancing Your Home Mortgage

Is refinancing a mortgage a good deal?As homeowners write those monthly mortgage checks each month, it is natural for them to wonder whether they could somehow lower that monthly mortgage payment. Interest rates rise and fall as economic conditions change, which makes many people curious about whether they could pay less over the life of their mortgage loan. Whether refinancing is a good idea for any specific homeowner comes down to a number of factors outside of the latest interest rates. All of the following should be considered before someone makes a decision about whether refinancing is a good fit for them:

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

1. Refinancing means a new mortgage.

A mortgage refinance isn’t a renegotiation of an existing mortgage. It is actually a completely new loan. This loan may be from the borrower’s current lender or another one instead. It’s important to be sure that the homeowner completely understands any new terms that might affect the cost over the life of the new loan.

2. There might be up front costs to refinance.

Because a refinance is a new mortgage, the loan will include closing costs. While some loans offer zero closing costs as a perk, this often means that the costs are folded into the mortgage itself as a higher interest rate. It is important to consider these closing costs when estimating whether a refinance will save money over time. For instance, on a new loan with a payment that is $150 less per month and $4,500 in closing costs, it would take two and a half years before the borrower will break even for the closing costs.

3. Refinancing can make sense if a home’s value has gone up.

Equity in the home is the first qualification for refinancing a mortgage. While only a fraction of each mortgage payment goes toward the principle each month during the early years of a mortgage, a homeowner’s equity can also increase if the home’s value goes up, as well. As a general rule, a homeowner will need to have at least 20% equity in the home before most lenders will consider refinancing the loan.

4. A good credit score is key.

Lenders have gotten much more choosy about the credit scores that qualify for home loans, including refinancing. Someone who has seen their credit score increase since they first got a mortgage will find that they can get a much better deal than someone who has seen their credit score go down. Paying debts on time, responsibly managing a range of types of credit and using only a portion of available credit all can have a positive influence on a credit score over time. Experts recommend using no more than 30% of available revolving credit to keep a good score.

5. Borrowers need a good debt to income ratio.

Most Edina homeowners may assume that they can qualify for a new mortgage if they have qualified for one before. However, lenders have gotten more strict about the portion of a household’s income they want to see going toward the mortgage every month. A household’s overall debt to income ratio should generally be no more than 36%. Some lenders want debt to income ratios as low as 28%. However, factors like high income, a substantial amount of savings and a long and stable job history can convince lenders to consider higher ratios.

6. Private mortgage insurance (PMI) may be a factor.

A borrower who has less than 20% equity in the home AFTER they refinance may have to pay for private mortgage insurance. This cost could eliminate any savings that refinancing introduces in the first place. PMI is usually paid monthly as part of the monthly mortgage payment. So it is possible that the refinanced month;y mortgage payment could actually be higher than before once the new PMI payment is included.

7. Taxes could go up or down.

Many people who refinance a mortgage discover that their tax deductions for their mortgage interest go down after getting their new loan. Others find that their deduction increases for the first few years before dropping again. In any case, borrowers should be prepared for changes in their tax bill at the end of the year.

Every borrower is different, so it is hard to make blanket recommendations about whether someone should refinance their mortgage or not. By looking at every factor individually and doing the math on the existing and proposed loans, homeowners can see whether refinancing will save them money, or whether it will introduce unexpected costs.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

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