You're ready to refinance, but aren't quite sure if you should go through with it. Refinancing your home loan can offer benefits including lower mortgage rates, switching from an adjustable rate mortgage (ARM) to a fixed rate mortgage (FRM), or rolling your current first mortgage and home equity loan into one mortgage. Should you refinance? Consider the following for help with your decision:
- Know your current home value and LTV: Local real estate agents can provide an estimate of your current home value, and you can divide your mortgage balance(s) by your home's value to determine its loan-to-value ratio or LTV. For example, if your home is worth $200,000 and your mortgage balance is $150,000, your LTV is 75 percent. Mortgage lenders typically limit refinancing to no more than 80% of your home's value, but one exception is FHA-insured loans, which have more liberal lending guidelines.
- Credit scores and interest rates: Before shopping for mortgage refinance loans, it's worth checking all three of your credit reports and scores with the major credit bureaus Experian, Equifax, and TransUnion. Although mortgage lenders may approve mortgage loans for borrowers with compromised credit, getting the best mortgage rates usually requires credit scores of 720 or more.
- Breaking even: If you're planning to sell your home within a few years, you may not break even on a refinance. Breaking even requires making enough payments at the lower rate to save more than the cost of refinancing. It may be possible to refinance with no out-of-pocket closing costs, which means there is no break even point. However, there will be a smaller difference in your monthly payment from a higher interest rate or larger loan balance.
- Closing costs: It's easy enough to compare your current mortgage rate with proposed refinance terms at a lower rate and think, "no brainer." Accurately estimating savings requires more complex calculations; you'll need to deduct closing costs from any projected savings. A good place to get a handle ion what your costs will be is by reviewing your existing mortgage's HUD-1 form, which you got when your existing mortgage closed.
- Cautions when refinancing: Plenty of homeowners have lost their homes after using cash-out refinancing to fund everything from buying ski boats to expensive vacations, then lost their homes when home values crashed. You'll want to make certain that your refinance provides you with value today and tomorrow.
Refinancing with current low mortgage rates can create a great opportunity for saving and eliminating unpredictable mortgage features.
