Author Ivy Truong// Editor Karim Mourad, Family, Real Estate

Dispelling Financing Myth

“Refinancing” is a scary word for many people, but that shouldn’t be the case for you. For many homeowners, refinancing not only lowers your monthly payments and helps with your monthly budget, but it can also save you thousands of dollars in the long run.

You are not too late

For years now, we’ve been hearing that interest rates will be on the rise, and although there have been some small increases, you’re still in a great position to drastically lower your interest rate. The general rule is if your mortgage interest rate is more than one percent above the current market rate, you should consider refinancing.

It’s not too time-consuming

Don’t brush off refinancing just because it seems like a long and daunting process. An informational call with a lender to see how rates compare will only take a few minutes. There are also some programs for streamlining the application process. And besides, isn’t the amount of money you could save worth the time and effort?

ARMs can be refinanced, too

Seeing your Adjustable Rate Mortgage (ARM) increase after the introductory period can be incredibly stressful and place a squeeze on your budget. Many people assume they’re stuck, but ARMs can be refinanced, just like fixed-rate mortgages. You can even switch to a shorter-term fixed-rate mortgage, such as 15 or 23 years. The longer you’re planning to stay in the home, the more sense it makes to look into refinancing.

Factors to consider when refinancing

Home Equity: First of all, you need to find out how much home equity you have. Refinancing with little or no equity is not always possible with conventional lenders. The easiest way to find out is to use some of the popular consumer sites Zillow.com, Redfin.com, or Realtor.com. The best and most accurate way to find out if you qualify for a specific program is to visit a lender and discuss your individual needs. Homeowners with at least 10-15% equity will have better chance.

Credit Score: Lenders have tightened their standards for loan approvals in recent years, so some consumers may be surprised that even with good credit they will not always qualify for the lowest interest rates. Typically, lenders want to see a credit score of at least 720 or higher to qualify for better interest rates.

Debt-to-income ratio: Don’t assume that you already have a mortgage loan; you can get a new one. While some factors such as a high income, stable job history or substantial savings may help you qualify for a loan, they are not the only things lenders look at. In general, lenders usually want to keep the monthly housing payments under a maximum of 28% to 31% of your gross monthly income. Overall debt-to-income should be 36% or less, although with some additional positive factors some lenders will go above 40%. Just like when you try to buy a house and get the first mortgage, you may want to be prepared and pay off some debt before refinancing in order to qualify.

Refinancing cost: A home refinance usually costs between 3% and 5% of the loan amount. If you have enough equity, you can roll the costs into your new loan, increasing the principal. When you see offers like “no cost refinance”, remember, you pay for it one way or another. Usually that means you will pay a slightly higher interest rate to cover the fees. Negotiate and shop around before committing to a big loan is always a good idea.

It is important to figure out whether the costs of refinancing will be covered by your monthly savings, which is the only way for refinancing makes sense for you. For example, if your refinance costs you $2,000 and you are saving $100 per month over your previous loan, it will take 20 months to recoup your costs. If you intend to move or sell your home within two years, a refinance under this scenario may not make sense.

Rates and Terms: Do you know you are looking for in a loan? Having a good understanding about rates and term will help determine which mortgage product meets your needs.

*If your goal is to reduce your monthly payments, you will want a loan with the lowest interest rate for the longest term.

*If you want to pay less interest over the length of the loan, look for the lowest interest rate at the shortest term.

*If you want to pay off your loan as fast as possible, you should look for a mortgage with the shortest term at payments you can afford.

Points: Points usually equal to 1% of loan amount, which is paid to lender to bring down interest rate. When you shop around for rates and term, don’t forget to put points in consideration. Be sure to calculate how much you will pay in points with each loan, since these will be paid at the closing or wrapped into the principal of your new loan.

Refinancing is a complex process. To be honest, when it comes to houses and mortgage, nothing is simple and easy. Again, do your homework and consult experts. The good news is there are many resources at your fingertips when you are willing to learn and dig in nowadays. Beside the knowledge you will gain, the amount of saving over time well worth your time and effort.

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