What to Know Before You Refinance

The federal reserve rate drop has enticed more homeowners to refinance their existing mortgages.  Mortgage News Daily reports the refinance index increased 144 percent over the save week one year ago.  Mortgage applications are up 1.5 percent from the previous week, mostly from refinance applications.

Bottom line, if borrowers haven’t been able to find their next homes due to supply constraints in their budget, they can still give themselves the present of a lower mortgage rate, and smaller monthly payments by the end of 2019.  Happy New Year!

Wondering whether you should refinance?  Many lenders agree that if you can lower your interest rate by 1% or more, then a refinance can be worth it. Some refinance to lower the payment, and only you will know if the new mortgage lowers your monthly payment enough to make refinancing right for you.

Regardless of why you are considering a mortgage refinance, there are things to know before you refinance:

1. How much you can save from a refinance is based on several factors: 
   • Your current credit.  If you have paid as agreed on your accounts, and paid off collections, your credit score may be higher than when you originally got a mortgage on your home.  That can improve your new interest rate options.
   • Your current debt to income ratio.  If you have been paying down your debt, and/or have higher income, you may be a better risk to a lender because the ratio of your debt to your income may be lower.
   • The loan to value.  If your home appraises higher than what you bought it for, the loan to value may be lower.  Even if you were stuck paying PMI (Private Mortgage Insurance) from the beginning, it may be much lower or even removed when you refinance.  If your home appraises for less than what you paid for it, the loan to value may be higher and the PMI may or may not improve.
2. Your home may appraise for more or less than you paid for it.  This affects the new interest rate and the PMI requirements.  The appraised value is not automatically the market value.  Market value is how much someone will pay to buy your home.  Many factors go into that number, including current demand in your area.  The appraised value is a professional opinion of value by a licensed real estate appraiser, based on sales of similar homes in the same market area within a reasonable period of time, such as six months.  Those sales already occurred; you may or may not be able to sell your home for that price.
3. The new loan principle balance will usually be higher than the old mortgage loan was.  Even if you don’t have to pay them up front, there will be costs in a refinance.  Usually lenders will roll those costs into the new mortgage loan’s principal balance.  You can offset this increase by bringing money to the closing to pay your closing costs out of pocket, or to pay down the principal balance of your new mortgage loan.  You need to look at all the number to decide if this makes sense for you, especially at a time of the year when so many people strain their budgets.  Don’t pay down a mortgage at 3.5% interest if it means you will spend that money next month on a credit card with an 18% interest rate.

When you are ready to refinance, working with an experienced mortgage professional makes a huge difference. HomeRefiNetwork.com can match you to an informed loan professional who can help you find the mortgage refinance program that delivers the savings you are looking for.