Interest rates have been getting lower and lower because of the coronavirus pandemic, making many people eager to tap into lower interest rates for their homes. After all, with rates below 3 percent for borrowers with excellent credit, it’s possible to really take a chunk out of the overall total of payments you’ll make during the lifespan of your mortgage.
Just to see how much you could be saving, think about how much your mortgage is currently. For every $100,000 of your mortgage, 1 percent of your interest rate is equivalent to $1,000 a year in interest. If you’re truly interested in refinancing your mortgage, make sure that you know the facts first.
After all, just because interest rates are low doesn’t necessarily mean that you should jump on the bandwagon if you don’t know what you’re getting yourself into. Here’s everything you need to know before refinancing your mortgage.
Understand your credit score.
Before you decide whether or not to refinance, it’s essential that you have a solid understanding of your credit score. This is because when you look to refinance your current mortgage by getting a new loan, a crucial component of your loan application will be your credit report.
Just because mortgage lenders are advertising incredibly low-interest rates doesn’t necessarily mean that you’ll qualify for those rates when you go to refinance. As such, if you don’t have a high enough credit score, you may not get the rate you’re looking for from a new loan. Your credit score is impacted by a variety of factors, including how much of your credit you’re utilizing, how old your loan and credit card accounts are, and, most importantly, whether or not you pay your bills on time.
Get a clearer picture of your home’s equity.
Knowing how much equity you have in your current loan and home is important to qualifying. This is because, without enough existing home equity, you may not qualify to get a new mortgage loan with a different underwriter.
For example, it’s generally recommended that you have at least 20 percent equity in your property if you want to increase your chances of refinancing. That being said, just because you have a lower amount of equity doesn’t necessarily mean that you won’t be able to refinance. It ultimately just means that your options will be more limited and you may need to provide additional documents in order to qualify for a new loan.
Compare refinancing options.
Once you’ve determined whether or not you feel comfortable refinancing, it’s time to compare your options. In order to see which lender can offer you a lower interest rate, you’ll want to gather the documents needed to refinance your home loan. First and foremost will be proof of income, including payslips or a letter from your place of work confirming your current salary and employment stability.
Beyond that, you’ll need to share information about your existing home loan and any other loans you might have. Your credit card statements will also determine your DTI or debt-to-income ratio. Your DTI is an important aspect any time you’re trying to get out of a mortgage with a higher interest rate since your loan amount will have a lot to do with how comfortable a lender is giving you a new loan.
If you have a lot of debts and minimum payments compared to your existing income, you’ll likely hurt your eligibility for getting a new mortgage. Getting this paperwork together will make it easy to fill out your application for a refinanced loan, ultimately letting you compare your options and pick the right lender.
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Before Refinancing Your Mortgage