What to Consider Before Refinancing?
Before refinancing, weigh your equity, credit score, how long you will keep the home, your other debts, the closing costs, any prepayment penalty and the loan term. A lower payment alone is not enough. The refinance should support a specific goal and pay for itself within the time you plan to own the home.
Key Takeaways
- Equity and credit shape your pricing, your mortgage insurance and your loan options.
- How long you will stay in the home decides whether the closing costs can be recovered.
- Your debt-to-income ratio, prepayment terms and loan term all affect the real value of a refinance.
- Use a written checklist and compare Loan Estimates for the same loan amount and term.
What should I think about before I refinance?
1. Your equity
Equity is the part of your home’s value you own. The more of it you have compared with the amount you borrow, the lower the lender’s risk and the better your pricing can be. On a conventional loan, less than 20% equity generally means PMI. Equity also limits cash-out amounts. Your equity depends on a current appraisal, so see using a new appraisal.
2. Your credit score
Most conventional refinances start at a 620 score. Programs like FHA and VA use different minimums, and lenders may require more. Higher scores generally bring better pricing. Pull your credit reports before applying, dispute errors early and avoid new debt while your loan is in process.
3. How long you will stay in the home
This one factor decides more refinances than any other. If you may sell within a few years, closing costs may not be recovered. If you expect to stay a long time, a lower rate or shorter term can pay off. An adjustable-rate loan with a fixed starting period may suit people who will move before it adjusts, but it carries rate risk if plans change. Use the break-even calculator to test your timeline.
4. Your other debts and income
The lender calculates your debt-to-income ratio (DTI): monthly debt payments divided by gross monthly income. Conventional loans are commonly approved up to about 45%, and sometimes up to around 50% with strong factors. Paying off a car loan or card before applying may help. A cash-out refinance can consolidate debts, but it turns unsecured debt into debt secured by your home, so think about that risk.
5. The closing costs
Refinance closing costs often run roughly 2% to 5% of the loan amount. You can pay them in cash, finance them into the loan, or accept a higher rate in exchange for a lender credit. None of these are free. The costs of refinancing page lists each item, and factoring in the costs shows how to put them into a break-even calculation.
6. Prepayment penalties
Some loans charge a fee if you pay off the loan early. These are uncommon on conventional, FHA and VA loans, but they exist on some other products. Check your note or ask your servicer before you apply.
7. The loan term
If you are 8 years into a 30-year loan and refinance into a new 30-year loan, you will make payments for 38 years in total. If you want lower payments, consider a term that is close to your remaining years. If you want to be debt-free sooner, a shorter term raises the payment but cuts the total interest. See rate-and-term refinance.
8. The type of loan you hold
FHA, VA and conventional loans each have different refinance paths. FHA and VA borrowers may qualify for streamline refinances with less paperwork. See conventional refinance options and VA refinance options.
9. What you are giving up
Your current rate, assumability (FHA and VA loans can be assumed with approval, while conventional loans generally cannot), and any benefits tied to your existing loan are gone when you refinance. Make sure the new loan is better in the ways that matter to you.
A quick pre-refinance checklist
- Write down your goal in one sentence.
- Find your current rate, balance, remaining term and payment.
- Estimate your home value and equity.
- Check your credit reports and DTI.
- Decide how long you expect to keep the home.
- Gather two years of tax returns or W-2s, recent pay stubs, bank statements and your mortgage statement.
- Get written Loan Estimates and compare total costs and break-even.
The monthly payment should never be your only consideration. Weigh your goal, the term, the rate and the cost together. For savings math, continue to how much will I save by refinancing, or return to the refinancing a home overview.
At Lendia, we help you check every item on this list
At Lendia, we review your equity, credit, debts and timeline with you and compare options from multiple lenders. Contact us or get a rate quote now.
Frequently Asked Questions
How much equity do I need to refinance?
It depends on the program. Many refinances are available with modest equity, 20% avoids PMI on conventional loans, and cash-out refinances commonly require you to keep about 20% equity.
Is it worth refinancing if I plan to move in a few years?
Usually only if the break-even is shorter than your stay, or the refinance has little cost, such as a lender-credit option.
Will paying off debt before I apply help?
It can lower your DTI and improve qualification, but keep enough cash for closing costs and reserves.
Should I refinance to a shorter term?
If your budget can handle the higher payment, a shorter term can cut total interest a lot. Keep an emergency fund.
Can I refinance if I am self-employed?
Yes. Many self-employed borrowers qualify with tax returns, and others use bank-statement programs. See the self-employed conventional loan guide.
Rates and terms depend on your situation; approval requires qualification.
Talk to a Licensed Lendia California Loan Officer
At Lendia, we review your situation and show you the programs you qualify for.