GMR 89: Is Now the Right Time to Refinance?
Episode 89
Refinancing your house can save you thousands in interest. With interest rates going down recently, this may be the right time to consider it. On this episode of GMR, we talk about things you need to know before you refinance.
SHOWNOTES
Things to know before you refinance
1 Do you qualify?
To qualify for refinancing you have to have ample equity in your home.
With the value of home having risen in the past few years, there’s a good chance a lot of people may qualify for refinancing.
The best way to find out if you have enough equity in your home to qualify is to check out a few lenders and discuss your needs.
Those with 20% equity will have an easier time refinancing.
2. What’s your credit score?
To qualify for the best rates, you will need to have a very good or excellent credit score. That means a score in the mid-700’s or better.
If your score is less than mid-700’s, you may have a tougher time getting a rate good enough to consider refinancing.
You can check your credit score through your bank or credit card company or on Credit Karma, a free app that will show you your scores for TransUnion and Equifax.
3. What is your debt-to-income ratio?
Lenders have become stricter on how much debt you’re allowed to carry.
You may have a higher income, long job history, and substantial saving may help you qualify for a loan, you’ll find that lenders want you to stay below the 28% of gross income for your house payment.
Your debt-to-income should be 36% or less to have the best chance of getting approved.
It is best to pay off some consumer debt before you apply for refinancing.
4. Understand the cost of refinancing
Refinancing can cost you between 2 and 5 percent of the total loan amount. More about this later.
Be aware of “no cost” financing. Usually means that you will pay a slightly higher interest rate to cover the closing costs.
Shop around and remember lenders can reduce or pay for some of these costs.
5. Understand rates & terms
Many borrowers focus on the interest rate, but there are many other factors to consider.
If your goal is to reduce your monthly payments as much as possible, you will want a loan with the lowest interest rate for the longest term (30 years).
If you want to pay less interest over the length of the loan, look for the lowest interest rate at the shortest term (10, 15 or 20 years).
Borrowers who want to pay off their loan as fast as possible should look for a mortgage with the shortest term that requires payments they can afford.
6. Mortgage loan points
When you compare loans, make sure you look at both the interest rates and the points. Points, equal to 1% of the loan amount, are often paid to bring down the interest rate. This costs you more in closing costs but can save you in the long run.
Calculate how much it will cost with the added points since these will be paid at closing or will be added to the principal of your loan.
7. Calculate total cost
It’s important to understand what your cost is for refinancing. If you plan to move in the next 2 to 3 years it may not make financial sense to refinance now.
Make sure you calculate how much you’re going to save by refinancing to make sure it’s worth it.
For example, if by refinancing your payment is lowered by $120 but your closing costs are $4000, it will take you 33 months to break-even - recuperate your closing costs.
8. Consider the cost of Private Mortgage Insurance
If you’re already paying PMI, refinancing won’t make much of a difference, unless you plan on taking more money out through refinancing.
If you have 20% equity and you take money out, something we would encourage you NOT to do, you may have PMI added into the loan. This might erase most of your savings.
Check with your lender to see if you will need to pay PMI and how much it will cost you.
RESOURCES
Budgeting and Debt Elimination Tools
Jesus on Money by David Thompson - stewardshippastors.com