In today's tough economy many people are considering refinancing their home mortgages. Low interest rates are a big plus. However, home values have fallen and lenders are doubtful.
Here are five things you need to know if you want to refinance your home.
1. Refinancing Equity: Equity is nothing but the value of your home without any loans on it. With the down payment already wiped out due to falling home value, you may face the bitter prospect of being burdened with more mortgage debt than your house is worth. However, the Home Affordable Refinance Program (HARP) helps those with little or no equity.
2. Credit Scores: Your credit score determines if you are going to get a good loan. Generally, scores of 700 or above will land you good deals. Also, consider the fact that while applying for a mortgage loan, the up-front fee of a few hundred dollars is non-refundable. Unless your score is good enough for the qualification, don’t apply.
3. Debt Ratios: Lenders estimate whether you can manage the new refinancing based on your debt ratio. It’s not the payments you made in the past. If you qualify for refinancing, your mortgage payment has to be less than 30% of your gross monthly income and your total debt payments should be less than 40% of your gross income. Total debt payments include credit card, car, and student loans, while the gross income is what you earn before any deduction like income tax.
4. Planning: Against the present 4.6% rate for 30-year fixed mortgages, you can get a cheaper loan if you opt for a hybrid one like an Adjustable Rate Mortgage. This offers a fixed rate for five years. Significant benefits will come your way only if you pay before the fixed period.
5. Annual Percentage Rate: APR determines both the fees and the interest rates. Lenders will charge high fees for lower monthly mortgage payments.
Other considerations include the length of the repayment and rules and regulations. You also need to calculate whether a lower payment means lesser cost to you in the end.
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