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Published On: Fri, Mar 9th, 2018

Refinancing Your Mortgage: What You Need To Know First Before Applying

Refinancing your mortgage can be a good option especially when it’s included in a well-thought plan. You have to remember however that these still have their risks, which have to be elaborated before you even apply. Refinancing your mortgage has its own set of advantages and disadvantages, which are elaborated below.

photo Alina Ku-Ku via Shutterstock

No Right Way

Before you think about refinancing, take a deep breath first and realize that there’s no right way to refinance your mortgage. Given that all our financial situations are different, the most optimal refinancing option you have will be different from other people around you. This is why thorough research and calculations on your end is most important because you have to carefully assess just how capable you are of affording this mortgage in the first place.

If you have any trouble, approach your lender and think of other options instead. Regardless, here are some of the things you have to know about refinancing your mortgage that needs consideration.

On Your Home

You have to remember that a lot of owners tend to have financial struggles themselves. Sometimes, the worth of their loan is more than the worth of the house they have itself.

However, this doesn’t mean a refinance plan is not a good option. This is because there are other plans that might accommodate them. The best approach when unsure is to ask your lender about this. However, do consider the following options as well:

  • Do you feel comfortable with your current terms? Some borrowers that have adjustable-rate mortgages, or those with interest-only mortgages, may understand the benefits of a fixed-rate loans. Some owners who will move within a year can finish their ARMs. Ask your lender, or another expert, if you think moving from an ARM to a fixed-rate, or staying in your ARM plan, can be a good way to go. This is because your mortgage deal and financial situation may differ from most other borrowers as well.
  • Do you have equity? This is an important question about refinancing, as you need to have 20-percent equity on your home or higher if you want to refinance your mortgage into a new loan. If not, you may have to pay private mortgage insurance. However, if you add the PMI to the new loan, this can negate the entire point of the refinancing in the first place.
  • Do you have enough? Remember, in order to qualify for a new refinanced mortgage, your new payment should be less than 30-percent of your monthly income. This includes insurance and taxes. In addition, your total debt payments (these include credit cards, student loans, and your car) should be less than 40-percent of your gross income, which is the total before taxes are taken out. You also have to get the documents, including stubs and tax returns, in order to prove that your gross income is really what it is. This means you have to think very carefully about your debt ratios.
  • Do you plan on staying long? Experts advise borrowers that refinancing a mortgage may normally cost less than 10-percent of the total loan. This means you can easily make calculations on how long it might take to pay off a refinanced mortgage. However, assess how long you plan on staying in your to-be-refinanced home, and if it fits the schedule. If, say, a refinanced mortgage loan makes the payment last for 15 months and you’re staying for about six years, then good. But if it’s for 15 months and you already plan on moving in about a year or two, then a refinance might bring in more hassle, refinance with bad credit.

On Your Plans

You may have heard good things about refinancing loans, as after all some choose this option to lower interest or even the monthly payment. This is a practical solution if you want to pay off your mortgage much quicker. However, this might be or might not be the best option depending on your financial plans. Remember, your overall financial plan is the reason why you’re taking the mortgage out in the first place. Consider:

 

  • Do you have enough credit? As you might be aware by now, getting a good credit score is essential in availing numerous loan options. This is why you may have gotten the mortgage in the first place. However, do consider trying to increase your score while you’re paying off the mortgage. You can do this by cleaning your record, deactivating unused accounts, and paying off other debt. If you have enough credit for a good refinance deal, then perhaps refinancing your mortgage can be a good option. Try to aim for a 620 score, as this seems to be a safe number.
  • Does it fit the timing? You may have to assess the current timing of your planned refinancing. For instance, remember that certain rates tend to be cheaper or much more expensive depending on the length you choose, and whether or not you plan on staying where you live for a long time. Be sure to consult your lender about potential cost changes when thinking about a refinanced mortgage.
  • Do you have another credit? If you plan on refinancing a mortgage while having another mortgage or loan, then you might experience some difficulty getting one. It’s best if you either just pay off the other mortgage as it is, or just combine the two mortgages. If not, the second lender may have to agree to be behind the first lender, which he or she may not be happy with. So be careful with this as well.
  • Does this fit your goals? Remember, a good financial plan is one of the key indicators that will lead you to financial stability. Refinancing mortgages do tend to lower monthly payments, or some choose this to lower their interests. However, don’t focus too much on paying off the mortgage. Instead, assess how your current plan and potential refinanced plan fits into your overall financial goals. If it seems to be a good fit with each other, then well and done. However, if refinanced plans to lessen monthly payments compromises your other goals, then you may need a reassessment.

Conclusion

Refinancing your mortgage can become an option, but it has to be planned carefully. Always remember to have your plans one step ahead of you just to make sure your refinancing goals wouldn’t compromise your overall budget. If you have trouble with the math, always remember it’s not bad to consult with experts in the field as well. What about you? Have you tried refinancing your mortgage? How was your experience?

Author: Pankaj Deb

About the Author

- Outside contributors to the Dispatch are always welcome to offer their unique voices, contradictory opinions or presentation of information not included on the site.

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