When it comes to your home, you want to make sure that you are getting the most out of it. One way to do this is by refinancing your mortgage. This can be a great way to get a lower interest rate, pay off your mortgage sooner, or even get cash out for home improvements. However, there are a few things you need to know before refinancing. In this blog post, we will discuss seven of the most important things you need to know about mortgage refinancing! So, let’s get started…
Know Your Credit Score
Your credit score is one of the first things a lender will look at when you apply for a mortgage. Depending on your credit score, different home refinance resources will be available to you. This means that it is important to know your credit score before you start shopping for a mortgage. A higher credit score means you’re seen as a lower-risk borrower, which could lead to a lower interest rate on your loan. On the other hand, a lower credit score could lead to a higher interest rate and less favorable loan terms. You can get a free copy of your credit report from each of the three major credit reporting agencies once per year. By doing so, you can keep an eye on your credit score and make sure it is accurate.
Know Your Home’s Equity
Your home equity is the portion of your home that you own outright. You can calculate your home equity by subtracting the amount of money you still owe on your mortgage from the appraised value of your home. For example, if your home is appraised at $200,000, and you owe $100,000 on your mortgage, then you have $100,000 in home equity. If you have a lot of equity in your home, then you may be able to qualify for a cash-out refinance. This type of refinancing allows you to tap into your home equity and use it for home improvements, debt consolidation, or other purposes. In addition, you may be able to get a lower interest rate with a cash-out refinance than you could with a traditional refinancing.
Know Your Debt Ratios
Your debt ratios are another important factor that lenders will consider when you apply for a mortgage. Your debt-to-income ratio is the amount of money you owe each month divided by your monthly income. For example, if you owe $2000 per month and your monthly income is $6000, then your debt-to-income ratio is 33%. Most lenders prefer to see a debt-to-income ratio of 36% or less. In addition to your debt-to-income ratio, lenders will also look at your loan-to-value ratio. This is the amount of money you owe on your mortgage divided by the appraised value of your home. For example, if you owe $100,000 on a home that is appraised at $200,000, then your loan-to-value ratio is 50%. Most lenders prefer to see a loan-to-value ratio of 80% or less.
Get Your Paperwork in Order
Before you apply for a mortgage, it is important to get your paperwork in order. This includes things like your tax returns, pay stubs, and bank statements. Lenders will use this information to verify your income and assets. In addition, you will need to provide proof of employment and your current address. If you are self-employed, then you will need to provide additional documentation, such as profit and loss statements. You can do this by gathering up your most recent tax returns, bank statements, and pay stubs. In addition, you should have a list of your current debts and assets.
Carefully Time Your Mortgage
The timing of your mortgage is also important. If you are trying to lower your monthly payment, then you may want to refinance when interest rates are low. On the other hand, if you are trying to pay off your mortgage sooner, then you may want to refinance into a shorter-term loan. You should also be aware of any prepayment penalties that may apply to your current mortgage. For example, some loans have a penalty for paying off your loan early. This means that you would need to pay a fee if you refinanced into a shorter-term loan. These penalties can add up, so it is important to factor them into your decision.
Shop Around for a Mortgage Lender
Not all mortgage lenders are created equal. Some lenders may offer better terms than others. It is important to shop around and compare offers before you decide on a lender. You can start by talking to your current lender. They may be able to offer you a better deal than other lenders. In addition, you can check with local banks and credit unions. You can also look online for mortgage lenders. When shopping around, be sure to compare interest rates, fees, and loan terms. Additionally, don’t forget to read the fine print. Some lenders may charge hidden fees, so it is important to know what you are getting into before you sign on the dotted line.
Know Your Taxes
Finally, you should be aware of the tax implications of refinancing your mortgage. When you refinance, you will need to pay closing costs. These costs can include things like appraisal fees, loan origination fees, and title insurance. In addition, you may be required to pay points. Points are a fee that you pay upfront in order to get a lower interest rate. One point is equal to one percent of your loan amount. For example, if you are refinancing a $100,000 loan, then one point would cost you $1000.
These costs can add up, so it is important to factor them into your decision. Additionally, you should be aware that the interest you pay on your mortgage is tax-deductible. This means that you can deduct the interest you pay on your taxes. However, there are some limits on this deduction. For example, you can only deduct the interest on a loan up to $750,000. Therefore, it is important to talk to your tax advisor before you refinance your mortgage.
By following these tips, you can be sure that you are getting the best deal on your mortgage refinance. Just remember to shop around, know your taxes, and carefully time your mortgage. With a little bit of effort, you can save yourself a lot of money.