9 Things I wish I knew before I refinanced my home!

Whether or not mortgage refinancing is right for you depends more on personal details than this week's mortgage interest rates. The following are nine critical considerations to review before applying for a home refinance.


1. Home Equity

Homeowners with at least 20% equity will have an easier time qualifying for a new loan. Refinancing with little or no equity is not always possible with conventional lenders, but some government programs are available. The best way to find out if you qualify for a particular program is to visit a lender and explain your exact needs.

2. Credit Score

Lenders have tightened their standards for loan approvals in recent years. Even with good credit some will not qualify for the lowest interest rates. Typically, lenders want to see a credit score of 760 or higher in order to qualify for the lowest mortgage interest rates. Borrowers with lower scores may still receive a new loan, but the interest rates or fees they pay will most likely be higher.

3. Debt-to-Income Ratio

Do you have a mortgage loan? You may assume that you can quickly get a new one. However, lenders have raised the bar for credit scores, and have become more strict with debt-to-income ratios. While some factors, such as a high income, a long and stable job history, or substantial savings, may help you qualify for a loan, lenders typically want to keep the monthly housing payments under 28% of your gross monthly income. Overall debt-to-income should be 36% or less.

4. Refinancing Costs

A home usually refinances costs between 3% and 5% of the loan amount. Borrowers can find several ways to reduce the expenses or envelop them into the loan. If you have sufficient equity, you may roll the costs into your new loan. Lenders sometimes offer a "no-cost" refinance, meaning you will pay a higher interest rate to cover the closing costs. Negotiate and shop around because some refinancing fees can be paid by the lender or reduced.

5. Rates vs. Term

Establish your goals when refinancing to determine which mortgage product meets your needs. If your goal is to decrease your monthly payments, you want a loan with the lowest interest rate for the most extended term. If you want to pay less interest over the length of the loan, find the lowest interest rate with the shortest term. Borrowers who wish to pay off their loan as fast as possible should look for a mortgage with the shortest term.

6. Points

Look at both the interest rates and the points when comparing various mortgage loan offers. Points, equal to 1% of the loan amount, are frequently paid to lower the interest rate. Calculate how much you will pay in points with each loan since these will be paid at the closing or wrapped into the principal of your new loan.

7. Break-Even Point

An essential consideration is the break-even point, the point at which your monthly savings have covered the costs of refinancing. After that point, your monthly savings are yours. If, for example, your refinance costs you $2,000, and you are saving $100 per month over your previous loan, it will take 20 months to recoup your losses. If you intend to move or sell your home within two years, a refinance under this scenario may not make sense.

8. Private Mortgage Insurance

Homeowners with less than 20% equity in their home will be required to pay Private Mortgage Insurance when they refinance. If you are already paying PMI under your current loan, this will not make a big difference to you. Yet homeowners whose homes have depreciated since the purchase date may find that if they refinance they will have to start paying PMI for the first time. The reduced payments may not be low enough to offset the additional cost of PMI. A lender can determine if you will need to pay PMI and how much it will add to your payments.

9. Taxes

If you refinance and begin paying less in interest, your tax deduction may be lower. However, it is also possible that the interest deduction will be raised for the first years of the loan when the interest share of the monthly payment is more significant than the principal.