9 Things to Know Before You Refinance Your Mortgage
Refinancing your home is always a big decision, but it can be complicated by issues you may not understand. That’s why we will try to help you with nine things you need to consider before you refinance. Then we will tell you how AHL Hard Money Network can help.
Home Equity — This is probably the biggest barrier to refinancing because most conventional lenders will require you to have some equity in your home to qualify. Another issue over the last few years is that home values dropped and owners became “upside down” on their mortgage, which means they owe more than the home is worth. The more equity you have, the better are your chances to refinance.
Credit Score — Credit score has become a bigger issue for conventional lenders over the last few years, and just having a “good” credit rating may not get you the best interest rates. Be prepared for that, or talk with AHL Hard Money Network because we are less concerned about your credit rating.
Ratio of Debt to Income — Another fallout of the recent mortgage market crash is that many lenders use stricter rules for the amount of debt they will accept with the income you have. Many lenders use ratios as low as 28-30 percent for the maximum home mortgage payment they will underwrite. If you have higher debt, consider trying to pay off some of it before refinancing.
Costs of Refinancing — You can expect refinancing costs to be 3-5 percent of the loan value. If you have higher equity you may be able to roll the costs into the loan, thus creating a higher principle to pay off. Another option is to ask for reduced closing costs by accepting a slightly higher interest rate.
Interest Rates and Terms — Many people focus on the interest rate of the loan but ignore the term of the refinanced mortgage. A longer mortgage creates a lot of interest expense over the life of the loan. Therefore you need to review both the rate and term of any proposed mortgage versus your budget.
Points — A point equals one percent of the mortgage value, and can be used to reduce the interest rate on the mortgage. They are normally paid at closing and can increase the closing costs beyond your budget. If you add them back into the mortgage they increase the principal of the loan. Understand the points required for any refinancing before you proceed.
Time to Break Even — Refinancing should include a calculation of the break-even point. If you pay $4000 to refinance your mortgage and only save $50 per month as a result, it will take 80 months or almost seven years before you save money. Of course, you will save money on interest not paid over the mortgage if the new interest rate is lower. It’s important to understand the break-even point when refinancing.
Private Mortgage Insurance — This is insurance that protects the lender, and is normally required when you refinance with low equity in your home. The problem is that some homes are now lower in value than when the first mortgage and the owner may face PMI payments for the first time which increases the monthly mortgage cost.
Taxes — If you rely on your current mortgage deduction to reduce your taxes, keep in mind that refinancing might result in a lower deduction depending on the new interest rate. Offsetting this is the fact that you pay more interest early on the mortgage, so refinancing could give you a higher deduction.
If you wish to refinance your mortgage but don’t qualify for conventional financing due to a lower credit rating or other issues, AHL Hard Money Network can help. We rely on the equity in your home to secure your mortgage, and hard money can help while you rebuild your credit. Give us a call today for a consultation about refinancing your home mortgage.