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Considerations Before You Refinance

Theoretically it is a great time to refinance your home mortgage if you have a high mortgage interest rate. Theoretically, got that?

The Housing Puzzle

Back in the day there was a prevailing myth that real estate prices always go up. Even Will Rogers said, “Buy Land, They ain’t making any more of the stuff”.

And that is true, they ain’t making any more of the stuff (land, that is…still building a few houses, at least in my area) but unfortunately for many people they have learned the hard lesson that real estate prices don’t always go up and when there is a huge bubble, like there was, it is bound to burst.

But if you are able to refinance it is a great time to get low, low interest rates.

Here are some considerations.

Conventional lenders will not always refinance a mortgage unless there is equity in the home. Do you owe at least 15% less than the current market value? If you do it will be easier to qualify.

You will probably need a credit score of at least 720 to get the lowest rates.

Along with the credit score is your debt to income ratio. Your house payment should be approximately 28% to 31% of your total monthly income. Your total debts including all credit cards, car payments and any revolving credit but not things like utilities on your home should not exceed 36% of your total monthly income.

It typically costs you money upfront to refinance a home, usually between 3-5% of the loan amount. If you have enough equity you may be able to roll the costs into the loan thereby reducing the upfront costs or some lenders may offer a “no-cost” refinance but that typically means that you will be paying a slightly higher interest rate. Different lenders will charge you different amounts. Shop around.

Consider the rate vs. the term. This depends upon your personal goals. Do you want to pay off the house sooner or do you want lower payments now? Consider the possibilities of moving and selling within the next few years also.

Points are often paid to buy down the interest rates. One point is equal to 1% of the loan. They are usually paid at closing but can be wrapped into the loan, depending upon equity, of course.

If you have less than 20% equity in your home you will be required to pay PMI, or private mortgage insurance. Even if you didn’t have private mortgage insurance on your last loan it may be required on your new refinance because of the declining real estate market. Your lender should disclose to you early on if PMI is necessary and how it will affect either your payment or your balance owed.

If you start paying less interest your mortgage tax deduction will also decrease. This is not usually a reason not to refinance but it is a consideration.

Have you refinanced before? Do you plan on refinancing soon?

 

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