Generally, people consider refinancing to lower the interest rate, take cash out or shorten the loan term. However, before applying for the mortgage refinancing, you must be aware of the following things.
3 Things to Consider Before Refinancing Mortgage
1. Credit Score
Due to interest rate increases, borrowers might find it harder to be approved for a mortgage. And because of this, people with “Decent” credit scores are failing to get a loan at a low-interest rate. That is why if you are thinking of refinancing your mortgage and lowering the monthly interest, ensure that your credit score is better than average. Usually, banks or lenders prefer a credit score of 760 or above to approve a mortgage. If your current FICO score is less than that, try improving the score before applying.
You can easily calculate your credit score online; just answer the query and you will get your FICO score.
2. DTI or Debt-to-Income Ratio
After the FICO score, you will have to consider your DTI ratio. From this ratio, lenders or banks measure one’s ability to pay off the debt. It is the ratio of your monthly debt payment divided by your monthly income.
Say your monthly mortgage payment is $1,200, and other monthly debt is $500. So, your total monthly debt payment is $1,700. And your monthly income is $5,100. Now, if you divide the total monthly debt payment with your monthly income, the DTI will be 30%.
Usually, banks or lenders prefer a DTI of 50% or lower. If your current DTI is way above this level, it will limit the mortgage financing option. So, if you have a higher DTI ratio, try to increase your monthly income and lower the debts you have to pay every month.
3. Refinancing Costs
When you are refinancing, there are some costs associated with it. Usually, it costs about 4%-6% of the total mortgage amount. However, you can cut refinancing costs by transferring the them to your loan. However, by doing so, the mortgage's principal will increase.
Again, some banks or lenders allow no-cost refinancing. So, before refinancing your mortgage, shop around a bit and select the one with low or zero mortgage refinancing costs.
FAQs about Mortgage Refinancing
· Is It possible to purchase a car while mortgage refinancing?
If you are refinancing, you should avoid putting more financial stress on yourself. Besides, if you’re purchasing a car with a loan, it will affect your DTI and credit score. But as stated above, for mortgage refinancing, you must have a high FICO score and DTI ratio. And when you purchase a vehicle with a loan, these metrics will decrease, making the entire process more difficult.
· How much should I keep for mortgage refinancing?
As of 2020, the median mortgage refinancing cost is around $4,000. Also, the refinancing cost takes up to 6% of the loan principal. It means if you have a $200K mortgage refinance, it will cost you $5K to $10K.
Conclusion
Before refinancing the mortgage, ensure at least 15%-20% equity. Besides, try to keep the FICO score above 760. Moreover, the DTI ratio shouldn’t be more than 36%.
