Refinancing your home loan can lead to big savings if completed under the right conditions. Every mortgage and borrower is different, so an opportune situation for one homeowner does not necessarily apply to others. Prior to making a decision to refinance, think about these 5 mortgage refinancing factors.
5 Mortgage Refinancing Factors
1. Your Personal Needs
Your personal situation will influence whether you should refinance and the programs that will meet your needs. When do you expect to sell the property? Will you possibly refinance again? Do you expect to convert it into an investment property? Does your current loan have a pre-payment penalty? How much do you have available to cover closing costs? These are all important questions to ask yourself and to discuss with your loan advisor.
2. Mortgage Rates
Mortgage rates reflect market conditions, credit score, loan amount, and loan term. First, consider whether rates are expected to rise or fall given what is going on in the economy and with the federal government. No one can predict the future, but there may be certain circumstances that will directly alter rates. Second, find out what rate will you receive with your credit score and loan amount. The one you receive may not necessarily be the lowest rate. You will receive lower interest rates if your credit ranking is high. Lastly, compare the new interest rate to your old one. The savings (each month and during the duration of the loan) should be compared against the cost of refinancing. Generally, it is worthwhile if the new rate is one percent or more less than the old rate.
3. Expenses for Refinancing
It is useful to assess both the overall cost of refinancing and the amount needed at closing. Every mortgage has costs associated with it. Loans promoted as having no closing costs typically mean that they are either lumped into the loan amount or are covered by a higher interest rate. Some costs, such as pre-paid expenses, are not classified as closing costs but will result in out-of-pocket expenses.
Normally, a refinance will mean some money brought to closing. Funds that you receive back from your old escrow account can offset some of this. Additionally, you will have one month without a loan payment. For example, if you refinance during the month of June, you will have already remitted your June mortgage payment and the first installment due on the new mortgage will not be due until August 1st. One exception to requiring money at closing is a cash out refinance. In that case, the amount due would be deducted from the equity funds.
4. Loan-to-Value Ratio
You may have heard the term loan-to-value. This percentage reflects the loan amount versus its current market value. The value of your property fluctuates with the real estate market. Although a real estate agent can prepare a good estimate of market value, an appraisal is required at the time you refinance to determine the specific amount. Maximum loan-to-value percentages will apply (the specific ratio depends on the loan program). If the value of your home is less than the mortgage balance, you will have trouble refinancing without cash to reduce the loan principal. Some loan products, such as an FHA streamline refinance, do not require an appraisal and therefore make this less of an issue.
5. Qualification Conditions
Every financing program has specific criteria and limitations. The following is a list of common ones:
- Loan-to-value Percentage
- Credit Score
- Type of Property
- Dollar Amount of Loan
- Reduction in Monthly Payment
- Need for Non-occupant Owners
- Mortgage Insurance Percentage and Payment Period
PA Refinance Factors – The Next Step
As you can see from the 5 mortgage refinancing factors above, assessing a refinance encompasses more than comparing interest rates. It requires consideration of personal factors and evaluation of available options. A knowledgeable mortgage consultant can assist you with these different factors and help you make an informed decision. For more PA refinance factors, contact Pedro Teixeira at FIT Credit.