As a homeowner, at some point in time, you may decide to refinance your mortgage. Replacing your existing loan with a new home loan is considered refinancing a mortgage. A popular reason to refinance an existing mortgage loan is to reduce the interest rate and reap the savings that will occur through the lower interest rate.
In most cases, refinancing a mortgage loan should result in your interest rate going down by at least 1% or more. Before going too far into the refinancing process, use a refinance calculator to determine the potential savings.
Reasons to Consider Refinancing Your Home
There are many reasons for considering refinancing your home. The new loan could:
- Lower the interest rate, which thereby lowers your monthly payment.
- Shorten the term - your mortgage will be paid off faster.
- Convert an adjustable-rate mortgage to a fixed-rate mortgage. Or vice versa.
- Lower the interest rate, and the term of the loan.
- Draw cash out the home’s equity to use for other purposes. The term for this is a cash-out refinance.
Requirements for Refinancing your Home
There are three key factors that lenders will consider when they are determining if they will approve your refinance mortgage application. These are:
- Your credit score – Your history of paying back debt and other factors make up your credit score calculation. Lenders use this to determine how likely you are to pay back your loan. The higher your credit score, the less risky you appear to a lender, and you may also benefit from a lower interest rate offer.
- Your income – How much money you earn is a significant factor in your ability to pay back the new loan.
- Your home equity – The percentage of the home you own is your home equity value. If you take the value of your home and subtract the amount that you owe on your existing mortgage, that will be the value of your home equity. Lenders will use this to determine how much they will allow you to borrow.
Other financial factors are also reviewed by lenders to determine if you are eligible to refinance your mortgage. One important factor is your debt-to-income ratio. This calculation takes the sum of all your monthly debts and divides it by your gross (before tax) monthly income. Also known as your DTI, it weighs heavily on whether you will be approved for refinancing because it indicates your ability to repay the loan. It would be best if you tried to have a DTI that is less than 43%.
Your loan-to-value ratio is another way to express your home equity and another factor that lenders will look at during your refinance request. This ratio looks at how much you still owe on your home against its value. An example, you have a $400,000 home that you owe $100,000 on, then your LTV would be 25%.
Your interest rate and the fees you will pay are also part of what is determined with your LTV. Most lenders also require that a borrower take out private mortgage insurance if they have less than 20% equity in their home. This will also be necessary if an LTV is more than 80%.
When you are ready to refinance your home, NASB is here to assist you. Give us a call at 855-465-0753 to get started.