Want To Refinance Your Home Loan? Ask these four questions first.
1: How is My Current Loan?
If you have an adjustable rate mortgage, you may want to switch to a fixed rate mortgage simply for the additional security it offers you. On the other hand, if you are planning to move relatively soon, your current mortgage could be a better deal whether it’s fixed- or adjustable-rate.
When trying to decide what to do, compare the cost of refinancing with what it would cost you in additional interest to hold on to your existing loan. While the breakdown is different for every borrower, generally, you’ll need to keep your current house and loan for anywhere from three to six years to break even on the costs of refinancing.
2: Do I Have Enough Equity To Get A Mortgage?
To get a conventional loan, you will usually need to have at least 5% equity. FHA requires at least 3.5% equity, VA and USDA can go to 100%.
Of course this is for rate and term refinances with no cash out and owner occupied. The equity requirements can be different depending on the type of loan you are getting.
If you have less equity than 20%, you could end up having to pay for private mortgage insurance. FHA requires mortgage insurance no matter what and there is no mortgage insurance with VA.
For conventional loans, there are a couple of options to buy out of mortgage insurance or add a small 2nd mortgage to off set the loan to value so mortgage insurance is not needed.
3: How Is My Credit?
If you pull your own credit scores there is no hit to your credit score for the inquiry. So it is a good idea to check out your credit so you can see where you are at and if anything needs to be fixed or is reporting incorrectly. Lenders will look at your credit score as a part of determining whether or not to make you a loan. With conventional lenders, your rate will depend on your score and the higher it is, the lower your payment will be.
FHA and VA interest rates are usually not affected by credit score, but can if the circumstances are unique. If your score is to low, you won’t be able to get any loan. Generally, 620 credit scores are the lowest that will qualify you for any loan. There are some lenders who can go below 620.
4: What Do I Want To Accomplish?
Mortgages typically offer a choice as to their term. While the 30-year loan is the most popular, shorter term mortgages save you money since you pay less interest over their lives. They also get you out of debt sooner, at least as regards your house.
The drawback is that they carry higher payments since you pay off more principal every month. This can make them less affordable for some borrowers, generally, you’ll need to keep your current house and loan for anywhere from three to six years to break even on the costs to of refinancing.
Deciding what to do with your mortgage can be complicated. Working with a qualified loan officer that can consider every angle with you can help you to make a better decision.