A home mortgage refinance may sound like a good idea since equity is growing fast, and interest rates aren’t growing at the same rate. However, it’s not always possible or desirable. As Anthony Hsieh says, “home owners need to be triathletes to qualify for a loan or refinance, with great income, great credit and great value in their home.” Check out these four questions to ask yourself before you refinance.
4 Questions to Ask Yourself Before You Refinance
Do I have equity in my home?
A big reason home owners decide to refinance is to get rid of their PMI (private mortgage insurance). To qualify, you need to have at least 20 percent equity in your home to qualify for a new loan. If you end up having to pay PMI to the cost of a new loan, it could negate the benefit of a refinance all together. If you have low equity you can still apply for a refinance. Some Fannie Mae and Freddie Mac programs accept them. The best way to see what is best for you is to talk with a lender.
Do I have good enough credit?
Credit is a big part in qualifying for a loan as well as a refinance. Mortgage rates operate on a sliding scale, with the lowest rates being awarded to applicants with the highest credit score. If you are hoping to refinance to lower your monthly mortgage, it’s important that your credit score will qualify you for a low enough interest rate. Borrowers with a 620 credit score or lower could have trouble qualifying for a mortgage or a refinance at any rate.
What are my long term financial goals?
Some people refinance to lower their monthly payments, while others choose a shorter term loan that allows them to pay of their home faster. It’s important to consider whether you want to retire without a mortgage before opting for a new 30-year loan. If you’re worried about a possible job loss, you may want to refinance into the lowest possible payment in case you experience an employment concern. Long story short, ask yourself before your refinance if obtaining a new loan aligns with your goals.
What are the terms of my loan?
Terms of your current loan should be something you ask yourself before you refinance. If you are currently in a subprime ARM loan, you should definitely consider switching to a new loan. But if you have a conventional ARM loan, you may actually find that you’re in a good position currently and your rates are actually dropping. The main thing to remember here is to talk with your mortgage lender to go over the terms of your current loan before you refinance.
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