Refinancing at the Right Time
While the goal for many homeowners when refinancing a home is to lower their monthly payments, some borrowers forget that there is a cost to refinancing. Many lenders allow borrowers to wrap closing costs and fees into the new home loan, but this typically adds to the principal balance. Make sure you take the time to do the calculation to see how long it is going to take before you pay off those closing costs with your savings. If you might sell your home within a year or so, it may not be the right time to refinance.
Before choosing to refinance a home, make sure you evaluate your goals. You may want to take advantage of lower rates, consolidate your debts, take a cash-out refinance to pay off high-interest debt, or avoid a larger monthly payment when an adjustable-rate mortgage resets at a higher interest rate.
Credit Scores and Mortgage Loans
Tighter credit restrictions have made credit scores an even more important indicator of whether you can qualify for mortgage refinancing and what your rates are going to be. Lenders typically base the interest rate for each customer on their credit score. In addition, they evaluate the monthly payment for your new home loan as part of your debt-to-income ratio. If you have a low credit score and must pay a slightly higher interest rate for your home loan, you may not meet the debt-to-income qualifications the lender requires.
For example, at MyFico.com, a $216,000, 30-year fixed-rate home loan was recently quoted at 4.26% interest for borrowers with the highest credit scores within the range of 760 to 850. At that rate, the monthly payment is $1,064. For borrowers with credit scores of 620 to 639, the interest rate would be 5.85%, with a monthly payment of $1,274. A high credit score in this example saves $210 per month on the mortgage payment or $2,520 annually.
Homeowners interested in refinancing should check their credit score and make any necessary corrections. If your credit score is low, you may want to wait to apply for mortgage refinancing until you are able to increase your score by paying down debt and paying all your bills on time.
While low interest rates are a good reason to consider mortgage refinancing, be sure the time is right for your personal financial situation before applying for a new home loan.
