Mortgage rates are starting to head upward after nearly a decade hovering at record lows. Still, rates are still relatively low by historical standards. There are plenty of people who didn’t have the equity or the credit required to refinance when rates were at their lowest, but do now.
With rates going higher, however, if you’re considering a refinance, it makes sense to do so sooner rather than later. Refinancing is not feasible for everyone, and sometimes it doesn’t make financial sense. The following considerations may help you decide if refinancing is the best choice for you:
Your credit score
Generally, borrowers with good or excellent credit scores will qualify for better rates. If your score is lower than you’d like, you can work on increasing it by paying all your bills on time and reducing your overall loan balances. Your credit report is among the documents typically required for refinancing, and while your lender will likely pull it directly from the agency, you should check it yourself for accuracy or other issues. Additionally, Finance of America Mortgage offers refinancing options for those with lower credit scores — ask your mortgage advisor for more information.
The amount of equity in your home
Some loan programs require that you have at least 20 percent equity in your home in order to refinance, though some programs will let you refinance with less, especially if you have good credit. You may have to pay for private mortgage insurance if your loanto-value ratio is above 80 percent.
Your current debt levels
Many loan programs require a debt-to-income ratio of less than 43 percent. If your ratio is much higher than that, you may need to work on reducing your debt levels. Proof of income (tax returns, W-2s, etc.) and outstanding debt statements are among the documents often required for refinancing.
You’re planning to remain in your home for the long term.
There are closing costs associated with refinancing a mortgage — on average, 1.5 percent of the value of the loan. If you’re not planning to stay in your home for more than five years, it may not make sense to incur the fees associated with a refinance.
You can shave at least a point off your current mortgage rate
Given the costs associated with refinancing, it may not make sense to refinance unless you can cut your current rate by at least one point.
One exception: If you’re in an adjustable-rate mortgage now — even if you’re paying less than current fixed rates — it may be smart to lock in a fixed rate so that you don’t have to worry about your rate going up in the future.
You’re less than halfway through paying off your mortgage
When you refinance a mortgage, you’re resetting the clock on the term. So if you’re 15 years into paying off a 30-year mortgage, refinancing into another 30-year mortgage could mean paying your mortgage for 45 years in total. If you’re significantly into your mortgage, consider financing into a 15- or 20-year mortgage instead.
Once you’ve decided it’s a good time for you to refinance your mortgage, be sure you have all of your documents that may be required for refinancing in order — find out more here.