While refinancing a mortgage is a common practice that often offers significant benefits to the homeowner, it’s also not a process that should be entered into lightly. There are a number of important variables to consider before you pull the trigger on refinancing, and the current mortgage rates available to you are just one piece of this puzzle.
At Clarity Quote, we’re here to help with one of the most important elements of any refinancing consideration: Determining the financial pros and cons, which our refinance calculator is enormously helpful with. We’re also here to help with numerous other areas as you determine whether refinancing is important to you — what are some of the most vital to keep an eye on? We’ll go over several in this multi-part blog series.
Know Your Current Equity Level
As you get started evaluating your refinancing worthiness, the first area to be aware of is your equity level. Your equity is the current worth of your home, which can be calculated several ways:
- A percentage calculation of the total value of the home versus what’s still owed on it.
- You can also estimate your equity by using a refinance calculator and entering in some simple information such as the price, terms and interest rate of your current mortgage.
Neither of these methods are perfectly accurate, but they are close enough estimates to use when considering whether or not refinancing is worth the option. If you have little-to-no equity in your house, refinancing probably isn’t a wise idea –it’s better to stay on top of any payments that could push you into negative equity status.
You can also think about how refinancing could affect your situation in the long run; if you’re planning to stay in your home for at least five years, then it makes more sense to refinance than if you’re planning on moving soon.
Credit is a vital component to many mortgage areas, and refinancing is no exception. If your credit score is not high enough to support a refinance, you may have to wait until it improves. Most lenders will require a minimum of 680+ for FHA loans and a 620+ for conventional refinancing funds.
These requirements can vary depending on the type of loan or details of your situation, so be sure to find out the specifics of your credit score before you apply for refinancing. Also, while it can be initially worrisome to see that your score is lower than other people’s might be, the important thing to keep in mind is that not all lenders use the same calculations — some are better at estimating your score than others.
Another important financial variable here is debt-to-income ratio, or DTI. Lenders have become stricter about this area in recent years, requiring a maximum DTI of no more than 36% for conventional financing and a FHA DTI of up to 41%. If your current DTI is higher, it may be necessary to take steps before refinancing in order to get this number down.
Some ways you can reduce your debt-to-income ratio include downsizing any private loans you have, working to reduce your overall debt or paying off any credit card balances. You’ll have to determine which of these is the best option for you based on current financial situation and lifestyle considerations.
For more on important factors to evaluate when considering a mortgage refinance, or to learn about any of our mortgage calculators or other services, speak to the staff at Clarity Quote today.