Know Your Fico Score And Dti
When you refinance, you swap out your current mortgage with a new loan. That new loan comes with a whole new loan application process, from a new credit inquiry to new closing costs and a new interest rate.
Youll usually need a credit score of 640 or higher to qualify for a new loan. Generally, the better your credit, the better loan terms youll be offered.
If youve maintained your credit score or its gone up since you got your first mortgage, it can be a good sign that its time to refinance. A qualifying credit score signals to a lender that youve managed your debt responsibly and can likely make your monthly mortgage payments.
Because the lender will perform a hard inquiry on your credit report, you will likely experience a dip in your credit score but its temporary.
For conventional refinance loans, lenders also look at your DTI. Thats a calculation of your total monthly debt as a percentage of your gross income.
You can use our DTI calculator to calculate your DTI and determine how it might change if you pay off certain debts or increase your income. Ideally, youll need a DTI of 36% or lower. Even if your DTI is higher, if you have a higher FICO® Score, you may still qualify to refinance.
Economic Reports Next Week
Well get retail sales figures for July on Wednesday. Theyre important because they reflect consumer confidence and that affects the possibility of a recession. However, we know, courtesy of yesterdays consumer sentiment index, that confidence has improved over the last month.
Wednesday also brings publication of the minutes of the last meeting of the Federal Open Market Committee . This is the Federal Reserves monetary policy committee. And markets will pore over every word to try to divine more about the Feds thinking and plans. Mortgage rates might move if anything of significance emerges.
There are several other less influential reports next week but most are mainly of interest to those who work or invest in construction or real estate.
Critical reports in the following calendar are shown in bold. Other reports next week are unlikely to move markets or mortgage rates much unless they contain shockingly good or bad data.
- Monday National Association of Home Builders index for August
- Tuesday July industrial production and capacity utilization.Plus July building permits and housing starts
- Wednesday July retail sales. Plus FOMC minutes
- Thursday July leading economic indicators and existing home sales. Plus weekly new claims for unemployment insurance to Aug. 13
Wednesdays likely to be the only big day for mortgage rates.
Switch To A Fixed Rate
If you have an adjustable-rate mortgage, you probably know it can be unstable and may cost you more if rates rise significantly. Switching from a variable to a low, fixed-rate mortgage can be a good way of eliminating the possibility your rates could go up and get you locked into a favorable rate now while the opportunity exists.
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How Long Does It Take To Refinance A Mortgage
Refinancing a mortgage can take anywhere from 45 to 60 days, depending on the type of loan you choose. For example, government-backed loans generally take longer to close than conventional loans.
To help avoid delays, make sure to fill out the application as accurately as possible, provide any requested documentation in a timely manner and be prepared for the home appraisal .
What This Mortgage Refinance Calculator Does
If you’re thinking of refinancing your mortgage, it’s probably because you want to save money. There are two ways to save money by refinancing:
Reducing the monthly payment.
Paying less interest over time.
It’s unlikely, but you may be able to accomplish both: reduce the monthly payment and pay less interest over time. But in most cases, you’ll do one and not the other:
Pay more every month but pay less interest over time.
Pay less every month but pay more interest over time.
Or a refinance could result in a higher monthly payment and more interest over time.
The results of this calculator explain which one of the above categories your refinance would fit into.
The calculator includes a colorful slider that displays the years remaining on your current loan. It calculates how much you would save , year by year, by refinancing.
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You Can Get A Lower Interest Rate
A higher interest rate will increase the overall cost of your mortgage. If youre able to lock in a lower rate because your credit score has increased or mortgage refinance rates have gone down, youre likely a good candidate for a mortgage refinance. With a lower interest rate, you can reduce your monthly payments and the total amount of interest you pay over the life of your loan.
Reason #1 Lowering Your Monthly Payment
The first way a refinance may lower your payment is with a lower interest rate than your original mortgage. If rates have gone down since you purchased your home, or your credit or income is significantly improved, you probably qualify for a more favorable rate.
The second way is by extending the loan term. If your original mortgage was a 30-year loan, for example, and 10 years in you refinance to another 30-year loan, youll be paying on that house for a total of 40 years. However, the balance remaining after 10 years of paying will now be spread across 30 more years, significantly reducing your monthly payments.
While that may seem tempting, Ruiz strongly recommends that if you must refinance, try to not extend the length of your loan, because its like starting from scratch again.
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Your Home Value Has Increased
If the value of your home has gone up, you might also get some benefit from refinancing, especially if you have other high-interest debt to pay off or another financial goal.
A cash-out refinance lets you take out a new mortgage thats larger than what you previously owed on your original mortgage, and you receive the difference in cash. A cash-out refi is an alternative to a home equity loan.
You also might consider a cash-out refi for home improvements or to pay for a childs education.
But youll want to make sure you dont end up paying more in mortgage interest than the interest you would pay on any debt youre using the cash to pay off.
You Recently Turned Your Side Hustle Into A Full
Did you ditch your day job less than two years ago? If you had a salaried position when you applied for your current loan and have since transitioned to running your own business, it could be tougher to get your refinance loan approved.
Thats because loan underwriters scrutinize self-employed borrowers differently than W-2 employees. Freddie Mac and Fannie Mae, the federally backed mortgage companies that buy and guarantee loans issued by lenders, require at least two years of self-employment to prove stable income.
Less than two years of self-employed income could be acceptable in certain situations, but youll have to document:
- Sustained or increasing income
- Your experience in the business, and
- Demonstrate that the marketplace accepts the service or products of your business
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Verify You Have Job Stability
If your employment and income are steady, a refinance loan could free up room in your budget.
If youve already applied for a mortgage refinance, let your loan officer know if your job situation or pay rate changes before you close. Lenders typically reverify your income before closing, and any changes could cause delays or even result in a loan denial.
You Need To Change Your Loan Term
There are several reasons homeowners might want or need to change their loan term. Heres a bit more information on switching to a longer or shorter term.
Longer Mortgage Term
Are you having trouble making monthly mortgage payments? A refinance can allow you to lengthen the term of your mortgage and lower your monthly payments. For example, you can refinance a 15-year mortgage to a 30-year loan to lengthen the term of your loan and make a lower payment each month.
When you lengthen your mortgage term, you may get a slightly higher interest rate because lenders take inflation into account, and a longer mortgage term means you will likely pay more in interest over time. If you know your current payment schedule isnt realistic for your household income, a refinance can free up more cash so you can invest, build an emergency fund or spend it on other necessities.
Shorter Mortgage Term
You can also refinance your mortgage in the opposite direction, from a longer term to a shorter term mortgage. When you switch from a longer-term mortgage to a shorter one, you will likely enjoy lower interest rates and youll also own your home sooner.
Usually , switching to a shorter term also means that your monthly payments will increase, so make sure you have enough stable income to cover your new payments before you sign on for a shorter term.
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Should I Refinance To Lower My Payment
For many homeowners, the primary motivation is to lower their monthly payments or obtain a lower rate. This can be accomplished by refinancing if the rate is significantly lower or if a loan term restructure is practical. The question is, how do you know if you should refinance?
You can expect closing costs to typically be two to five percent of the loan amount. What’s more, these are the costs for someone with what is considered very good credit lower credit scores could mean higher upfront costs.
When considering a refinancing, its essential to learn about current refinance rates, loan terms, and closing costs. How many months will it take you to break even, considering your upfront costs? Are you planning to stay in your home long enough to recoup your investment? These are important considerations knowing as much as you can about the market and your financial situation helps you make an informed decision and hopefully the right decision for you.
If Both The Monthly Payment And Interest Will Be Higher
If you’re not going to save money either way, you probably don’t want to refinance. But you might be compelled to refinance anyway as part of a divorce settlement or to switch from an adjustable-rate mortgage to a fixed-rate loan, for example.
The slider and the bars under it are red in this scenario.
You Recently Refinanced Your Home Loan
You refinanced a few months back, but interest rates have continued to drop. Should you refinance again? There are two factors you should consider: how much you paid in closing costs for your recent refinance and the cost to close on another loan.
If you havent hit your break-even point on your last refinance, you may want to reconsider youll end up paying closing costs all over again with another refinance.
Is Now A Good Time To Refinance Your Mortgage
Leslie CookOriginally Published: Originally Published:7 min read
For many homeowners, the chance to refinance into a lower interest rate is long gone. But for others, there’s still ample opportunity.
According to the mortgage analytics company Black Knight, nearly 1.3 million well-qualified U.S. homeowners can reduce the rate on their home loan by at least 0.75 percentage points. These borrowers would save an aggregate of $405 million per month, which works out to a savings of $320 per month per homeowner.
When it comes to refinancing, the lower you can bring down your interest rate, the more money you’ll save over time. Most mortgage experts say it’s best to aim for a reduction of at least 0.75 percentage points , but in some cases, a reduction as small as 0.50 percentage points could be worthwhile.
If you’re considering a refinance this year, it may make sense to do so sooner rather than later. Mortgage rates are expected to keep climbing which means waiting could reduce your chance of finding a better interest rate. If you’re unsure whether a refinance is in your best interest, read on for more information that can help you decide.
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Why Should You Refinance Your Mortgage
The benefits of refinancing your mortgage loan can include helping you reach other money and lifestyle goals sooner. And here are other reasons to consider a refinance:
- You want to change your loan term: If you need to lower your monthly mortgage payment, you can extend your mortgage term. Shortening your loan term can help you own your home sooner.
- You want to lower your interest rate: Refinancing to a lower interest rate will lower your monthly mortgage payment and the total amount youll pay in interest over the loans lifespan.
- You want to tap into equity or consolidate debt: A cash-out refinance taps into the equity youve built in your home. You can use the money to save for retirement, finance home improvement projects or pay off debt.
- You want to switch from an adjustable-rate mortgage to a fixed-rate mortgage: Switching from an ARM to a fixed-rate mortgage keeps your interest rate locked in for the life of the loan. You can switch from a fixed-rate mortgage to an ARM to take advantage of falling interest rates, but that can be risky because the interest rate could go back up, and with it, your monthly mortgage payment.
- You want to get rid of mortgage insurance: Switching to a different home loan might help you save money by eliminating mortgage insurance and lowering your overall monthly payment.
Speaking of closing costs and credit qualifications, lets take a look at three key items you should consider before refinancing your mortgage.
How Much Can You Get
Current regulations allow homeowners to borrow up to 80% of the appraised value of their home. However, you must also consider how much of your mortgage has been paid off. Basically, the more money youve paid into your mortgage, the more cash you can access through a re-fi.
Lets say your home is worth $450,000, and lets assume that youve been paying down your mortgage for some time, so that you only have about $100,000 left.
In this scenario, 80% of the value of your home would be $360,000 and because you still have $100,000 left to pay, this means you can access about $260,000 in equity.1Footnote 1
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How Do I Know If It’s Worth It To Refinance My Home
Under the right circumstances, a mortgage refinance could help you save money or more easily manage your mortgage payments. However, refinancing isn’t beneficial in every situation.
It may make sense to consider refinancing if:
- The interest rates set by the Federal Reserve have dropped since you took out your first mortgage. In this situation, refinancing might help you save money over time in the form of lower interest payments.
- Your credit score has improved since you took out your original mortgage. Your credit score is among the factors that lenders consider when setting the interest rate and other loan terms for your mortgage. If your credit score has increased since you took out your first mortgage, you may now qualify for better options. In this case, refinancing may make it possible to obtain a lower interest rate or receive approval for a loan type that was previously unavailable to you.
- You need to lower your monthly mortgage payments and don’t mind paying more in interest. In some circumstances, refinancing for a longer payment term may help you reduce your monthly mortgage payments. Just remember that lower monthly payments often mean you’ll pay more money in interest over the life of the loan.
- The new loan would save you from paying PMI. You might consider refinancing if the process would give you access to a new loan that would not require PMI. Avoiding these payments is one way to make your monthly housing expense more manageable and save money over time.
Reason #: Your Credit Score Is Lacking
Your credit score plays a major part in determining what type of refinance rate youll qualify for. The higher your score, the better the deal will be. If your credit is less than stellar, you may have trouble finding a lender wholl be willing to work with you on a refinance. If you are able to qualify for a loan, the rate might not be that great.
With rates so low, it can be tempting to take what the lender is offering even if the savings youll see are small. If youre feeling the pressure to refinance, just keep in mind that the Federal Reserve has said it will hold off on increasing interest rates until 2015. Waiting until your credit score improves even just a few points could make a big difference when it comes to the type of rate you can get.
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You Want To Allocate More To Retirement Saving
One of the most powerful tools that you can take advantage of when it comes to saving for retirement is the principle of compounding interest. The earlier you start to invest and save, the more years you have to accumulate interest on your investments before you retire.
Cash-Out Refinance For Investing
If you have equity sitting in your home but you havent maxed out your annual retirement contribution limits, you may end up making more money over time by taking a cash-out refinance and investing the difference.
You can also use the money from a cash-out refinance to invest in your property. Whether you want to add a new bathroom, spruce up your paint or install a privacy fence, youre only limited by your imagination. Upgrades can bring in more money when you want to sell your house by increasing your homes value and curb appeal, both of which can help you secure a higher final closing price.