It is very important that you make a mortgage refinancing decision carefully. You will need to perform thorough due diligence as these transactions are complex. You should consider getting help from a reputable financial advisor or credit consulting outfit like us at CREDIT ACHIEVERS TODAY.
If mortgage refinancing seems right for you then follow the guidance below.
Most Important Points
- Equity in your home – you should have enough home equity for refinancing to make sense. Our recommendation would be a minimum of 20% home equity.
- Your credit score – the criteria for mortgage refinancing has become stricter over the last few years. You should have a credit score of at least 750 points.
- What is your Total Debt Servicing (TDS) – this is a measure of how much of your income you spend on debt payments and housing expenses. Your debt-to-income ratio needs to be 36% or less.
- Terms and Conditions – You need to fully understand the terms and conditions, refinancing costs and interest rates. Find out of you will require private mortgage insurance. All these things are important in determining whether mortgage refinancing is right for you.
- Break Even and taxation – You need to calculate your break-even point and assess how a refinance will impact your taxes.
1. Equity in your Home
To qualify for a refinance you must have home equity. It is usually not possible to refinance your mortgage if you have no equity or a very small amount. Conventional lenders will not normally be interested but you may find government programs that will help those who do not have the required financial strength. With a minimum of 20% home equity you should qualify for refinance.
2. Your Credit Score
Most conventional lenders will want to see a credit score of 760 and upward for you to obtain the lowest rates of interest. If you have a lower score than this you can still qualify for the refinance but you are likely to pay a higher rate of interest and increased fees.
We recommend that you work with an experienced credit consulting firm, like us at CREDIT ACHIEVERS TODAY, prior to making an approach to a lender. We will guide you and help to prepare your credit profile. We will check your credit with the 3 top credit agencies first. This is important as it can take a lot of time to get errors and omissions fixed.
3. Total Debt Servicing (TDS)
You should never assume that just because you already have a mortgage on your home and are making the payments as per the contract that you automatically qualify for mortgage refinancing. The criteria for these loans changes often in tune with economic trends. Recently, lenders are focusing on high credit scores and low debt-to-income ratios.
These are the things that will affect your TDS:
- Your income
- A steady job or income source
- Your savings
Lenders will look at your gross monthly income to see if your housing payments are less than 28% of this. They will also expect your debt-to-income ratio to be less than 36%. There are some lenders that will accept up to 43%.
We can help you by advising that you pay down some of your existing debt before you apply for a mortgage refinance. When this is done correctly, you can be confident that your application will be approved and you will receive favorable interest rates.
4. Refinancing Costs
With a mortgage refinance you can expect closing costs to be around 3% to 6% of the loan amount.
You can deal with these costs in a couple of ways:
- You can roll the costs into the new mortgage which is particularly helpful if you have a wide margin of home equity. Of course this will increase the principal amount of the loan.
- You can look for a lender offering mortgage refinancing at no cost. But you need to check that you will not have to pay higher interest rates for this. You will always have to pay closing costs so find out where they are buried.
When you have a good credit history and a low TDS you will be in a really strong position to shop around and negotiate the best refinancing deal from lenders.
5. Rates and the Term
At this important point you need to consider your reasons and ultimate goal of a mortgage refinance.
This is what you can do to achieve the long term goals:
- If you want a monthly payment reduction then go for the lowest rate of interest over the longest term
- If you want to pay the minimum amount of interest on the mortgage, then go for the lowest rate of interest for the shortest term
- If you want to pay off your mortgage as fast as you can then choose one with the shortest term and the most affordable payments
6. Points for Refinancing
These are normally 1% of the mortgage amount and they are used to reduce the interest rate. You will usually pay this in the closing fees, but you usually have the option to package this into the loan principal.
7. Your Break Even
This is an important aspect of the refinance approval process. Here there will be an assessment to see if the costs of refinancing are covered sufficiently by the savings each month. This is your break even point.
So if it is going to cost you $2,400 to refinance, but it this will save you $100.00 each month, it will take you 24 months to break-even. You need to convince the lender that you intend to keep your property for at least another 24 months otherwise refinancing is pointless.
8. Private Mortgage Insurance (PMI)
If you have less than 20% home equity this is a very important factor. It is a moot point if you are paying PMI already. But, you need to be aware that there may be scenarios where you experience a decrease in the value of your property from the original purchase price, which would mean that you must start to pay PMI.
The lender will focus on whether the reduction of payments with the refinance will be sufficient to offset the additional cost of the PMI payments.
We strongly recommend that you work with a tax advisor to see what impact, if any, your refinancing will have on your taxes.
Your taxes can be affected by:
- If you pay less in interest then your tax deductions decrease
- Your interest deduction on monthly payments may be more in the initial years than the principal, when the interest part of your monthly payment is larger than the principal
Mortgage refinancing requires a lot of thought and due diligence. We strongly recommend that you work with an experienced credit consulting firm like us to initially strengthen your credit profile and then work with a reputable lender so that you can determine if it is the right thing for you to do.
Contact us here for the best credit advice.