There are a number of reasons why people refinance mortgage loans. Perhaps they want to remodel their home which cannot be sold, pay off over-stuffed debt or send a child to college. If the home was bought around mid 2006, mortgage refinance would have helped save up to two hundred dollars per month. However, the recent economic upheavals altered this pattern dramatically lowering the rates significantly. Homeowners can relax knowing that the national average for refinanced mortgage loans has dropped to 5.6%, which is over one hundred dollars per month in savings. With this kind of savings, the concept of home mortgage refinancing is becoming more and more popular with homeowners nationwide.
One of the main reasons why people are refinancing loans is to upgrade their present living conditions. Renovating a home can be very expensive, and a little help from equity could be the best option. Houses are not selling like they used to. Home improvement loans would help in the renovation of present living conditions. You can use a home loan calculator to help you assess the impact of home loans. Such mortgage calculators calculate the potential cost savings from mortgage refinancing.
The benefits of refinancing a home mortgage loan are numerous. These include lower home refinance rates, lower payments, shorter length of mortgage, and cash-out refinancing. Whatever your reason may be, now is the best time to refinance your mortgage loan so as to benefit from the historical low rates.
Considerations Before Refinancing
Before applying for mortgage refinancing, you need to consider several things.
You cannot refinance if you are under water. Just like all mortgages, you will have the best chance at being approved if you have not less than 20 percent equity. However, this is a tough condition to meet if you live in a place where property values have dropped 20% or more. You can rise above the problem of equity by applying for a federal government loan program. You only require 5% equity to be eligible for FHA loans. To qualify for a VA loan, you require zero equity. With less than zero equity, you can owe more than your home’s worth and still be eligible for the Home Affordable Refinance program.
The mortgage market is a bit less stringent, but lenders are still wary. To get the best mortgage refinance rates, you require a FICO credit score of at least 720. To avoid surprises, get your credit score before applying for refinancing. Your credit score is calculated using information in credit reports put together by the three major credit bureaus: Experian, TransUnion and Equifax. You can obtain a free copy of all three credit reports once annually at annualcreditreport.com. But you will have to pay for your credit score.
Once you have your credit reports, scrutinize them for errors which could affect your score. If the reports show late payment, and this information is accurate, the best way to repair the damage is to prove to lenders that you have changed your ways. This will take time because you have to show a pattern of on time payments.
However, if the credit reports show huge credit card balances, you can improve your score fast by paying them off. Your ‘credit utilization ratio’, which shows the amount borrowed as a percentage of available credit, accounts for 30 percent of your credit score.
Little debt and ample income
Mortgage lenders want to be assured that you have a steady income and don’t have many other debts. Usually, they want your regular monthly expenses to consume less than 36% of your pretax income. This shows them your ability to make the mortgage payments. They will add up all your payments on student loans, credit cards and auto loans, as well as child support, alimony and the cost of the mortgage you want. If those expenses exceed 36% of your income, find the easiest and quickest ways to cut down those costs. Anything that reduces your debt-to-income ratio to below 36% will significantly enhance your chances of being approved.
If you have a line of credit or home equity loan, you will probably need to pay it off prior to refinancing. Before a lender refinances your first mortgage, they will usually need approval from the lender who holds your second mortgage loan. The lender of the second has to agree to ‘subordinate’ the loan, meaning it takes second place behind the new mortgage. Previously, this was not a problem. But in the advent of the credit crunch, most lenders want to get rid of home equity loans and lines, which are seen as riskier than first mortgages. As a result, many lenders are unwilling to subordinate their loans.
Will Refinancing Save You Money?
Will you save money by refinancing your mortgage loan? The only way of knowing this is to obtain mortgage quotes based on your credit and home and then process the numbers using a mortgage calculator. You can obtain refinance quotes from the internet with no obligation, which will give you a picture of where you might fall. It is also recommended that you apply with your local credit union or community bank. These institutions usually have the best rates and may guide you through the process. However, they sometimes have tight income, equity and credit requirements.
At the moment, the best mortgage rates on 15-year fixed home loans are around 4.02% (or 4.75% on 30-year fixed mortgages). If you currently have a mortgage debt of $200,000 at 5.75%, refinancing may save you over $100 per month on your payment and lower the interest you will pay over the life of the loan.
Unless you are having problems making your mortgage payment, the aim of refinancing should be to save some money on interest over the duration of the loan. Frequently, that coincides with a reduced monthly payment. But extending your mortgage’s term, even at a reduced rate, does not make sense unless you end up paying lower mortgage interest rates, not more.
It is important to note that refinancing costs money. Closing costs are usually between two and four percent of the loan (that is $6,000-$12,000 on a $300,000 refinance). These costs include an application fee, home inspection, appraisal and attorney’s fees.