Mortgage refinance might seem like a good move to make your mortgage payments affordable, but it is not always so.
First of all, it is not so easy to get a loan anymore, especially with the lenders tightening up the approval process. You need to have a great income, great credit, and even greater value in your home. That said some conventional mortgage lenders might offer loans at less stringent terms. Some of these might even get in touch with you through mortgage leads. You can go through their terms and see if you qualify to obtain a loan from any of them, before getting your mortgage refinanced.
If you are planning to sell your home anytime in the next few years, a mortgage refinance is definitely not something you should consider.
Here are a few things you need to consider before opting for mortgage refinance:
The Equity in your Home
Twenty percent equity in your home is a must if you need to qualify for a new loan. Some mortgage refinancers who might contact you through mortgage leads might offer you a loan even if your home value is lesser than this. However, you might have to pay private mortgage insurance which might cost you more in the long run, negating the very benefits of mortgage refinance.
Most homeowners owe more on their mortgages than what their houses are worth. However, they can still apply for a refinance through an FHA loan or one of the Freddie Mac or Fannie Mae programs. See if you fit into any of these programs, before deciding on a refinance.
Your Credit Score
Your credit score plays a major role when it comes to refinancing your mortgage at a better rate. In fact, without a good credit score, you may not even qualify for a mortgage. The lowest mortgage rates usually go to applicants who have credit scores of 720 or higher. If your score is below 620, you may have to forget about getting your mortgage refinanced.
Your Financial Goal
There are three main things that drive homeowners towards refinancing their mortgages:
- To lower their monthly payments
- To shorten the term of their mortgage
If you want to lower your monthly payments, you might have to look for a loan with a lower interest rate or convert your ARM loan into an FRM one (or vice versa depending upon the running rate). You can use a mortgage calculator or ask the mortgage lender who contacts you through mortgage leads, to find out what your payment would be after you refinance your mortgage.
If you are prepared to make higher monthly payments and reduce the term of your loan, you can restructure your loan from a 30-year mortgage to 20, 15, or 10-year mortgage. However, you will have to integrate such a decision with your overall financial plan before going ahead.
Mortgage refinance does come with a cost and it generally ranges from 3 to 6 percent of your loan amount. You will need to see how long it will take for you to reach the break-even point, wherein your savings will outweigh your costs.
If you are going to breakeven at 15 months and if you are not going to move out of the house for at least five years, refinancing might be a good option for you. Nevertheless, if you are planning to move within two years, refinancing doesn’t make sense.
If you are close to paying off your mortgage refinance is definitely not an option, considering the kind of costs that you will have to incur.
It doesn’t matter how many mortgage refinancers get in touch with you through mortgage leads; it’s not wise to get your mortgage refinanced unless it seems actually beneficial. Don’t just give in to their offers. Consider your options and make an informed decision.