What to Consider Before Refinancing?

Before you’re ready to refinance, there are several things you need to think about, including the following:

• Current Equity – Home equity is the amount of your home’s value that you own. The more equity you have to the amount being borrowed, the less risky your loan is and that translates to a potentially lower interest rate. All lenders follow the same guidelines for what percentage of equity you have in the home when pricing your loan rate. Anytime you have less than 20% equity in the home you’ll have to pay mortgage insurance since the level of risk is higher.
• Credit Score – Much like buying a home, you’ll need to consider your credit score when refinancing a mortgage. You’ll need a credit score of at least 620 (or 580 in the case of an FHA loan) in order to refi your home. High scores imply less risk in the lending world and that translates to lower interest rates.
• Length of Time in the Home– Not only do you need to wait a certain amount of time before you can take cash out if you just took over the title, but you also need to consider how long you want to stay in your home and whether refinancing will make sense. For example, do you really need to pay more for 15 years of rate certainty if you only plan on staying in the home for five years? An adjustable rate mortgage (ARM) is a loan with a 30-year term with a low teaser rate that stays fixed for a period of time – typically five, seven or 10 years – before it adjusts up or down, depending on what the market is doing. If you only plan on being in the home for 10 years, you would be able to get a lower rate with an ARM then you could with a fixed-rate mortgage and be ready to move before it ever adjusts. If you plan to own your home for two years or less, it’s likely not worth refinancing unless you refinance to a much lower rate.
• Other Outstanding Debt – A mortgage lender will have to take a look at your debt-to-income (DTI) ratio. The less income you have going toward debt, the better your chances will be to qualify. You can also look at taking equity out of your home for debt consolidation.
• Closing Costs – Closing costs on a refinance will typically be a bit cheaper than they are on a purchase, but they can still be significant. When talking to lenders about loan options, don’t overlook this. You may see lenders make reference to no-cost refinances. Know that there is no such thing. While you can often get a refinance with little to no closing costs, there’s a drawback. The lender will either charge a higher interest rate or roll the closing costs into the loan amount. For some people, it still makes sense to refinance this way and every situation is different. Just be aware that to get the lowest rates, you’ll typically have to pay higher closing costs. Be sure to speak with your Home Loan expert about all options.
• Mortgage Prepayment Penalties – Some lenders charge a penalty if you pay off your mortgage before a certain point in the term, say within five years of getting it. If you plan on refinancing, look at the terms of your current mortgage and see whether you’ll have to pay a penalty, because they should be factored into your decision as to whether a refinance makes financial sense.
• Loan Term – While there are exceptions if a financial change has made you want to drastically lower your payment, most people like to have a loan term that’s at least equal to the number of years they have remaining on their original mortgage if they can afford it. While many lenders only offer loans in set terms, Quicken Loans® is able to offer fixed-rate financing for conventional loans in terms anywhere between 8 – 30 years.

When you’re getting ready to refinance, the monthly payment shouldn’t be the only consideration. Make sure you’re also factoring in your goals, the loan’s term, your interest rate and closing cost. Not sure where to start? Our mortgage refinance checklist can help.