9 Things to Know Before You Refinance Your Mortgage

Mortgage refinancing is a hot topic right now, as interest rates are at historic lows. If you’re considering refinancing your mortgage, there are a few things you should know before you make the jump.

In this blog post, we will explore 9 things you should know before refinancing your mortgage. From credit score requirements to closing costs and more, read on to learn more about what you need to do before you refinance your mortgage.

1. Know Your Home’s Equity

Your home equity is the portion of your home’s value that you own outright. You can calculate your home equity by subtracting the outstanding balance of your mortgage from your home’s current appraised value.

For example, if your home is currently valued at $250,000 and you have an outstanding mortgage balance of $150,000, then your home equity would be $100,000.

If you’re thinking about refinancing your mortgage, it’s important to know your home equity because this will impact how much money you may be able to borrow. Lenders typically allow borrowers to refinance for up to 80% of their home’s value, so in our example above, the most you could borrow would be $200,000.

Of course, you’ll also need to factor in closing costs when considering a refinance, which can vary depending on the lender but are typically around 2-5% of the loan amount. So in our example above, you would need to have at least $4,000-$10,000 available for closing costs.

2. Know Your Credit Score

Your credit score is one of the most important factors in whether or not you’re approved for a mortgage refinance. Lenders will use your credit score to determine your loan terms, and a higher score will usually get you a lower interest rate. You can check your credit score for free with many online services, including Credit Karma and Experian.

If your credit score isn’t where you want it to be, there are some things you can do to improve it. First, make sure you’re paying all of your bills on time. If you have any outstanding debts, try to pay them off as soon as possible.

You can also sign up for a credit monitoring service like Credit Sesame, which will help you keep track of your progress. Finally, don’t apply for any new lines of credit or loans before you refinance, as this could negatively impact your score.

3. Know Your Debt-to-Income Ratio

Your debt-to-income (DTI) ratio is the percentage of your monthly income that goes toward paying debts. Lenders use this metric to determine whether you can afford to take on additional debt, such as a mortgage refinance.

To calculate your DTI, add up all your monthly payments for things like credit cards, student loans, and car loans. Then, divide that number by your gross monthly income (your pre-tax income). This will give you your DTI ratio.

For example, let’s say your monthly debts total $2,000 and your monthly income is $6,000. Your DTI ratio would be 33% ($2,000/$6,000).

Most lenders want to see a DTI ratio of 36% or less. If yours is higher than that, you may have trouble qualifying for a refinance loan. But there are programs available for borrowers with higher DTIs. Talk to your lender about what options might be available to you.

4. The Costs of Refinancing

When you refinance your mortgage, you will incur a number of costs.

These can include the following:

1. Application fee: This is the fee charged by the lender to cover the cost of processing your application. It is generally a few hundred dollars.

2. Appraisal fee: The lender will require an appraisal of your home in order to determine its current value. This fee can be a few hundred dollars.

3. origination points: These are fees charged by the lender to cover the costs of originating your loan. They can range from zero to several thousand dollars, depending on the size of your loan and the terms offered by the lender.

4. Discount points: You may have the option to pay discount points in order to lower your interest rate. Each point typically costs one percent of your loan amount.

5. Prepayment penalty: Some lenders charge a penalty if you pay off your loan early, in order to recoup their own costs associated with originating and servicing your loan.

5. Rates vs. the Term

When you refinance your mortgage, you have the opportunity to choose a new interest rate and loan term. It’s important to understand how these two factors affect your monthly payment and the total amount of interest you’ll pay over the life of the loan.

Your interest rate is determined by many factors, including the current market conditions, your credit score, and the type of loan you choose. A shorter loan term will usually have a lower interest rate than a longer loan term.

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The length of your loan term will affect how much interest you pay over the life of the loan. A shorter term means you’ll make more payments, but each payment will be smaller. A longer-term means you’ll make fewer payments, but each payment will be larger.

You can use our mortgage refinance calculator to estimate your new monthly payment and compare different scenarios side-by-side.

6. Refinancing Points

When you refinance your mortgage, you may be able to choose to pay “points” to lower your interest rate. One point equals 1% of your loan amount, and paying points can help secure a lower interest rate and monthly payment.

If you’re considering refinancing your mortgage, here are a few things to keep in mind:

-The general rule of thumb is that refinancing only makes sense if you plan on staying in your home for at least two years. This is because it takes time to recoup the costs of refinancing through savings on your monthly payments.

-Paying points upfront can help lower your interest rate, but keep in mind that each point costs 1% of your loan amount. So if you have a $200,000 loan, one point would cost $2,000. You’ll need to weigh whether the monthly savings are worth the upfront costs.

-Be sure to compare rates and terms from multiple lenders before making a decision. And remember, the lowest rate isn’t always the best deal – be sure to compare all the fees and terms before making a decision.

7. Know Your Breakeven Point

refinancing your mortgage, it’s important to know your breakeven point. This is the point at which the savings from refinancing offset the costs of refinancing.

To calculate your breakeven point, you’ll need to know the following:

1. The remaining balance on your current mortgage
2. The interest rate on your current mortgage
3. The term of your current mortgage
4. The interest rate you’re considering for refinancing
5. The term you’re considering for refinancing
6. The closing costs associated with refinancing
7. The points you’re paying to refinance (if any)
8. The monthly savings from refinancing (calculated as the difference between your old payment and new payment)
9. Any other fees associated with refinancing (such as an appraisal fee)
10. Your tax rate

8. Private Mortgage Insurance

9 Things to Know Before You Refinance Your Mortgage

If you’re refinancing your mortgage, you may be able to do so without having to pay for private mortgage insurance (PMI). PMI is typically required if you have a conventional loan and put less than 20% down on your home.

But even if you have a government-backed loan, like an FHA loan, you may be able to get rid of PMI if you refinance.

There are several reasons why you might want to avoid paying PMI. For one, it can add hundreds of dollars to your monthly payment. And over the life of your loan, you could end up paying thousands of dollars in PMI premiums.

Another reason to avoid PMI is that it’s possible to cancel it once you’ve built up enough equity in your home. If you have a conventional loan, you can ask your lender to cancel PMI when your home equity reaches 20%. For FHA loans, you can cancel PMI when your loan-to-value ratio drops below 78%.

Of course, there are also some drawbacks to refinancing without PMI. For one thing, it may take longer to build up enough equity in your home if you don’t have PMI. And if housing prices go down instead of up, it could take even longer to reach that 20% mark.

So before you decide whether or not to pay for private mortgage insurance, be sure to weigh all the pros and cons.

9. Know Your Taxes

When you refinance your mortgage, you will be responsible for paying taxes on the amount of money you borrow. This is because the interest you pay on your mortgage is tax-deductible.

If you are refinancing your home to take cash out, you will need to be aware of the tax implications of this as well. Cash-out refinances are not eligible for the same tax deductions as regular refinances.

You should speak with a tax professional before refinancing your mortgage to make sure you understand all of the tax implications involved.

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