Written by Blanche Evans
You may think it’s your last chance to refinance your mortgage before interest rates go through the roof. Or, you feel your home’s value has risen enough that you can get a better deal on your mortgage debt.
So how do you determine whether or not you qualify to refinance? First, establish how much equity you have. To refinance without paying private mortgage insurance, your LTV has to be 78 percent or less.
According to Zillow, you should find out how much your home is worth and how much you still owe on your current mortgage. Then divide the loan amount by the value amount. The answer is your loan-to-value (LTV) ratio. If your home is worth $300,000 and you owe $220,000, your loan to value is 73 percent. Your property value is going to be high enough to allow you to refinance.
Next, look at the affordability of refinancing. LendingTree.com suggests that the total of refinance payment plus other debts should be no more than 43% of gross income. Lenders weigh your monthly income and debt payments through a debt-to-income (DTI) ratio, advises LendingTree. To be on the safe side, your total monthly debt service, including your refinance payment, should be no higher than 38% to 43% of your gross monthly income.
Your refinance will go smoothly if your credit scores are high enough to exceed lender minimums, usually 620 to 660. Conforming loans — those that qualify for the secondary market — require higher credit scores than government-guaranteed loans, such as FHA loans. Check your credit at one of the free sites like Freecreditreport.com
Last, make sure it’s worth it to refinance. Most families stay in their homes a median of seven years. To cover closing costs, which can run into the thousands with loan origination fees, title searches and so on, you’ll need an average of three to five years before you break even. It’s only worth it to refinance if you can make a significant monthly savings and you plan on occupying your home for a few more years.
You may want to consider selling your home. A purchase loan costs about the same as a refinance, because the risks are the same to the lender. With the equity you’ve built, you could have enough after closing to put down on another property.
If you feel better off in the home you’re in, the advantages of refinancing are many. You can lower your monthly payment, or you can opt to pay more to get a shorter term on the loan, saving you thousands of dollars in interest.
Be prepared to show the same financial background as you did when you first purchased the home. Contact your lender and find out the requirements, which may include employment verification, your checking and savings accounts, and your debts. Take along some recent sold comparables of homes similar to yours from your local appraisal district or your real estate agent.