The decision to refinance a home loan should be based on individual circumstances, not necessarily this week’s mortgage rate. Homeowners should review their finances and develop a budget annually that reflects their goals. Gathering refinancing information should be part of that process.
Reasons to Consider Mortgage Refinancing
Determining why you want a home refinance is an important first step. Depending on your financial goals, you may look for different criteria in a refinance loan.
- Low interest rates. For most people, a home refinance starts with a lower interest rate loan that reduces the amount of interest you pay over the life of the loan
- Lower monthly payments. Many people choose refinancing as a way to reduce their expenses so they can pay off other debt or save more
- Shortening the length of the mortgage. Many homeowners want to own their home without a mortgage and opt to switch to a 15 or 10-year home loan when they can afford it
- Switching to a fixed-rate home loan. Borrowers with an adjustable-rate mortgage or interest-only loan may want the security of a 30-year fixed-rate loan
Once you’ve determined what your refinance goals are, gather all your bills and organize your finances so you can evaluate your budget before contacting a lender about a low cost refinance.
Budgeting for a Home Refinance
Pull together the following items so you can estimate how much you should be spending on your housing payments.
- Pay stubs
- Tax returns
- Bank statements
- Monthly bills (credit cards, car loans, student loans, day care, etc.)
- An estimate of your discretionary spending on entertainment, recreation, meals out, etc.
In general, financial experts recommend that your monthly housing payments (including mortgage principal and interest, taxes, insurance, and homeowner association fees) should be at 30% or less of your gross monthly income. This number varies and depends on other factors such as your income, your other debts, and whether you live in a high cost area. Overall, your debt-to-income ratio should be about 45% of your gross monthly income.
A mortgage refinance can help you get your budget into shape and may allow you to save additional money for an emergency fund, college tuition, or retirement. Preparing a budget can be a tool to motivate you to contact a lender to see if refinancing your home can help you reach your goals faster.