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How Can I Determine if I Should Refinance My Home Mortgage?

By Edited Nov 13, 2013 0 0

Most home owners choose to refinance their mortgages in order to reduce the monthly payments that they make. Other homeowners chose to refinance so that they are able to combine all their monthly bills, except utility bills, to one payment. Choosing whether it is a good time for refinancing your home will be based on how long you intend to live in the home, the number of years that you have been paying for the mortgage and the current prevailing mortgage rates. Refinancing a home is not hard, but it's a process that requires a lot of considerations.

Before you begin refinancing your home, you must first determine whether there is a need or not. In some instances, if you have been paying your mortgage for several years, then refinancing might not be the best option. In case you make up your mind to refinance your home, consult a mortgage broker or look in the newspapers to check the current interest rates. Look at the prevailing rates of interest and compare them with your payment rates. Are they higher, lower or the same? You must also decide whether you want an adjustable or fixed mortgage type for the new loan.You can get mortgage calculators online. You will be simply required to feed in the required data, such as the amount of the home loan that you currently owe and the new rates of interest. You will also be required to tell the number of years that you will pay the new home loan. After inserting all these information, you will get your new approximate monthly payments.

Compare your existing mortgage payment with your new payment. By subtracting your current mortgage payment from the new payment, you will be able to get the amount that you will be saving per month. You will, of course, have to consult a loans officer to confirm if the rates you found online are the prevailing rates.Since refinancing your mortgage can either save or cost you money, it is important that choose the best time to refinance. Look at the points when checking the current mortgage rates. Based on your current rate, you may lower your mortgage by about two points. If this is the case, you can go ahead and begin refinancing your home. You might as well compare adjustable rates and fixed rates. If your rate was adjustable, you might refinance the mortgage into a fixed rate.

Consider costs
You must realistically consider the length of time that you intend to live in the home. Since there are costs that amount to thousands of dollars, you might have to consider the amount of time that it would take to break even the mortgage if you decide to refinance. For example, let's say a 1.5% decrease in the interest rate decreases your monthly mortgage by $150. Now, let's assume that the closing costs on your refinance amounts to $3,000. This means that you will need to occupy the building for 20 months to break even of the refinancing. If your intentions were to move out in three years or less, a refinance will actually cost you.

Amount of Equity
Another factor that you must consider is the amount of equity that you have in the home. In order to refinance a mortgage, most banks will require that you have at least 20% equity. You can still refinance with a much lower equity, but you will most likely get benefits if you have a 20% or higher equity. On top of that, if you have lived in the home for some years and you have built a high amount of equity, you will be able to save more money because you will be able to refinance a lower amount that the initial loan amount. This might reduce your monthly payments because you will be paying back a loan that is smaller.

Don't Forget About New Terms
Most people tend to forget that refinancing extends the term of the loan. If you have been paying your 30-year fixed mortgage for the last ten years, only 20 more years will be remaining. In case you choose to refinance, you will choose another thirty year mortgage which you will begin paying from year one. Some people actually refinance from a thirty year to a fifteen year if already, they have some years of payments on their belts.

Tough underwriting standards.
All homeowners must document their income and assets before being allowed to refinance. You must prove to the lender that you are a capable borrower. Lenders want to ensure that homeowners can afford to pay off any debt obligations that they might have. Most lenders will be reluctant to underwrite a refinance if the overall debt load of the homeowner is more than 43% of the income of the family.

Refinance is not for the jobless
Refinancing is not an option for everyone that needs to lower his monthly payments or for those who have lost jobs. Banks will not give loans to such people until they show pay slips from their new jobs. The only option for a jobless homeowner might be the new government programs for folks who are distressed. This option, however, is usually available to individuals who are at least ninety days delinquent on their pay. In case you stop paying your mortgage, your credit score might take a serious hit.

Final Considerations
Before rushing to the bank for a refinance, you must consider the issues discussed above. Obviously, lower mortgage rates are good because they can save your money, but it's not that easy. You must first be sure that you will live in the home long enough to benefit you. You must also determine whether it's worth changing the terms of the loan. Your credit history is also important when considering a refinance. If your credit is not perfect or your report has negative marks, then refinancing is not for you. So if it is the lower rates that make you interested in a refinance, consult widely before deciding on the refinance. Ensure that it is not the rate alone that draws you.

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