Looking for a way to consolidate debt and lower your overall monthly payments? If you're a homeowner, a mortgage refinance may be one way to accomplish these goals. However, before you set your sights on refinancing, it's important to know a few things that could impact whether this is the way to go.
6 Things to Know Before You Refinance Your Home
Your credit score
One of the first things to look into when you're considering refinancing your home is your credit score. Generally, a better credit score means you'll be offered a lower interest rate. And lower rates translate to lower monthly payments. Whether you decide to go with lower monthly payments or to keep your payments the same, the lower rate you'll get with a good credit score can help you pay your refinanced mortgage off faster.
Your home equity
Your home equity is the difference between the value of your home and the amount you owe on your mortgage. In a refinance, you may qualify to borrow against your home equity and increase the amount of your current mortgage. While many homeowners may believe that refinancing requires at least 20 percent equity in your home, there is another option for homeowners with low equity. If you have a Fannie Mae or Freddie Mac loan and have stayed up-to-date with your mortgage payments, you may qualify for a HARP loan even if you have low equity.
Your credit ratios
In addition to your credit score, another factor that impacts your interest rate and terms when refinancing are your credit ratios. Also known as debt-to-income ratios, your credit ratios represent how much of your income goes to support your debt, including your mortgage payments, loans and credit card payments. Lower credit ratios indicate to lenders that you are a lower risk borrower, because you have more than enough income to support your monthly payments.
Competitors' refinance rates
Even if you've been approved for a refinanced mortgage through the same lender that gave you the original mortgage, it may be worthwhile researching what other lenders are currently offering. Perhaps there's a time-limited deal where fees are waived, rates are lowered, or other perks are being offered that may make it worthwhile to switch. If you're ready to get serious about refinancing your mortgage, compare multiple refinance offers at one time to find the best option for your situation.
The APR and the refinance fees
Find out about all fees your lender may charge – whether you're staying with your current lender or moving on. A prepayment penalty may come into play if you're paying your existing mortgage off early, even if you're paying it off with a mortgage from your current lender. There may also be application fees, loan origination fees, points charges, appraisal fees, house inspection fees, legal/attorney fees, the cost to get a new survey, and title search/insurance costs as well.
As competing mortgage offers may come with not only different interest rates but also different fees, it can be difficult to compare "apples to apples" unless you take a look at the Annual Percentage Rate (APR). This rate includes the annual interest rate as well as factoring in all the extra fees associated with a mortgage offer. While it's usually higher than the stated rate (because it reflects the additional costs), it's a great way to quickly assess which overall offer is lower.
The difference between fixed rate mortgages and ARMs
With a fixed rate mortgage, your mortgage interest rate stays the same for the entire term of the mortgage – it is "fixed." With an Adjustable Rate Mortgage (ARM), monthly mortgage payments change as the interest rate changes. When refinancing, you don't have to stay with the same type of mortgage you already had – after all, your situation may have changed. Before committing to one type, take a look at the other to see if it better meets your new goals.
Refinancing may not be the answer for every one. However, knowing a little about what's involved can help you make a more informed financial decision.