As reported by Reuters recently that US mortgage applications leaped as rock bottom interest rates lifted demand for home refinancing to a very high level. With so many people opting for refinancing you wouldn’t like to be left behind. Some of these motivations have both benefits and pitfalls so before you take the plunge, you need to consider what you need in order to qualify for refinancing, the objective you intend to achieve and at the end of it how much were you able to save.

Here are a few questions you need to ask yourself before you consider refinancing. Like how much you stand to gain from the interest rate of your current mortgage versus the current rate? If the difference in rate is little over 1% you may still see significant savings. Next, how long you plan to stay in your house? If you’re thinking of selling in the next three to five years, the amount you save on refinancing may not cover the costs associated with closing. And finally the type of loan you have, is it ARM or FRM? If you have an adjustable rate loan (ARM) you may want to refinance to switch to a fixed-interest loan (FRM). Before you opt for this change, you need to look at the adjustment period of your ARM, the indexed interest rate, and the margin on your ARM. Once you have all the numbers in order, you can calculate how much money you will save each month by switching to a fixed rate mortgage. Lastly, refinancing will include a closing fee and considering this fee should be the part of the equation to see how much you actually save.

Again, keep in mind that refinancing a mortgage generally costs between 3% and 6% of the loan’s principal. It takes years to recoup that cost with the savings generated by a lower interest rate or shorter term. So, if you are not planning to stay in the home for more than a few years, the closing cost of refinancing may negate any of the potential savings.

Again if you have been staying in the house for just a year and a half or two, would refinancing be beneficial and would you get a lender to refinance? In such situation the lender will not only consider the length of time you have been paying your mortgage but also other few factors like your credit history, your debt to income ratio and the amount of your equity in your home before he can make any favorable offers towards refinancing.

To better understand these criteria’s; let us see what they mean. A debt to income ratio is the percentage of a borrower’s monthly gross income that goes toward paying debt generally on a monthly basis. Usually, the smaller your debt-to-income ratio, the better is your financial condition, recommended debt-to-income ratio is under 15 percent. This percentage is good enough to get you a potential lender. And when the potential lender considers the equity in your home he is basically looking at the current market value of your home. If the value of the house happens to be lower than your actual mortgage, refinancing won’t make sense as negative amortization won’t allow a refinance to occur.

When refinancing your mortgage, remember you have lots of options. First get the terms of refinancing from your current mortgage company. It is always better to see what they have on offer in terms of rate of interest and type of loan. Before you lock on the interest rate your lender has offered, research other mortgage refinancing options on offer by other lenders or brokers. Also check with your bank or credit union. They may have favorable refinancing rates and terms. More options on the table give you a wider array of choices. Also consider refinancing expenses and consult a team of experts before you put your finger on the options available.

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Category: Finances
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