Any broker will tell you that interest rates are now at a record-low, and it’s the perfect time to refinance your home. Refinancing your home means paying off your current mortgage with a loan that has a lower interest rate. But you’re going to have to jump through a few hoops to make it happen; it’s not as easy as the commercials make it sound. So here is some basic information:
- The decision factors that a bank will usually use to decide whether to approve or deny the loan are based on your credit score and your debt-to-income ratio. A debt-to-income ratio is the amount of debt that you have, versus your take-home pay. Usually a bank will pass a refinancing loan if your credit score is over 700, and if your debt-to-income ratio is that your debt does not exceed 45% of your take-home pay. If either of those factors are unfavorable, meaning that the bank may feel like your past credit performance leaves trust to be desired, or if they feel like your income can’t cover the loan they are to give you, the bank may ask you to put more assets than your home on the line to secure the loan on their part. This may include cash, a 401k, or other property.
- The interest rates are usually not as low as the ones the banks are mass-advertising, unless you’re interested in financing for the minimum amount of the life of the loan (Usually 10 years), or unless you are in need to refinance a loan that is over a certain amount. So if you are looking to refinance for the high end of the loan life, meaning that you’d pay the mortgage off over a 30-year span, your interest rate is probably going to be a few points higher than the advertised lowest rate. The shorter loan term agreements are the ones that will save you the most money, because in the long run you will pay much less in interest, but the shorter loan time spans also mean that you will have higher monthly payments.
- If a bank advertises that there are no closing costs in refinancing your home, they are usually actually rolled into the loan or the interest rate. These closing costs cover the title fee, the appraisal fee (Because the bank has to hire an appraiser to make sure your home is worth the amount that you are refinancing), and other miscellaneous processing fees for the bank. These average out to be a total of $3000.00, and it may be possible for you to finance this amount along with your mortgage. If you do choose to roll these into your loan amount, then your interest rate will go up a few variables because the bank will charge you for the extra money borrowed.
- Definitely shop around, and know that a lot of factors in taking out a loan from a bank are negotiable, depending on your situation. Ultimately, the bank wants to work with you, you just need to get them the right variables and information.
- Be wary of refinancing your home with credit lines that have variable rates. Although those rates may be as low as two percent right now, we all know that balloon rates have gotten a lot of people in financial trouble.
Obviously, there is much more to learn about refinancing your home, and I am no expert or licensed broker. The best way to find out if refinancing your home is for you, is to shop around and talk to bank representatives for yourself.