Refinancing a home loan may result in significant savings when completed under the correct circumstances. Every loan and borrower is different, so an opportune time for one person may not be for another. Before making a decision to refinance, take a look at these 5 loan refinance considerations.
5 Loan Refinance Considerations
1. Your Unique Situation
Your specific situation will determine whether you should refinance and what programs will meet your needs. How long do you plan to own the property? Will you need to refinance again? Do you expect to convert it into an investment property? Does your current mortgage have a pre-payment penalty? Do you have money available to cover closing costs? These are all important questions to ask yourself and to keep in mind when evaluating the benefits of refinancing.
2. Interest Rates
Interest rates reflect market conditions, credit rating, loan value, and loan term. First, consider whether rates are expected to increase or decrease given what is going on in the economy and with the federal government. You cannot predict the future, but there are certain events that may directly affect rates. Second, find out what interest rate will you receive based on your credit score and loan amount. The one you can get may not necessarily be the advertised rate. You will qualify for better interest rates if your credit score is high. Lastly, compare the current interest rate to your old one. The difference (each month and during the length of the loan) should be weighed against the expenses associated with refinancing. Generally, a one percent variance makes refinancing worthwhile.
3. Costs of Refinancing
It is helpful to understand both the overall cost of refinancing and the cash due at closing. Every mortgage has expenses associated with it. Loans marketed as having no closing costs typically mean that they are either lumped into the loan amount or are reflected in a higher interest rate. Some items, such as pre-paid expenses, are not considered closing costs but will result in out-of-pocket expenses.
In most cases, a refinance will require some money brought to closing. You may get some cash back from the escrow account with the existing lender to offset some of this cost. Additionally, you may have one month without a mortgage payment. For example, if you refinance during the month of June, you will have already remitted your June mortgage payment and the first payment on the new mortgage may not be required until August 1st. An exception to needing money at closing is a refinance to cash out equity. In that situation, the amount due are deducted from the equity funds.
4. Loan-to-Value Ratio
You may have heard the term loan-to-value. This ratio describes the loan amount against the property value. The market value of your property changes with the real estate market. Although a real estate broker can provide a general estimate of market value, an appraisal is required at the time you refinance to determine the specific dollar amount. Maximum loan-to-value percentages are usually required (the exact percentage depends on the loan program). If the market value of your property is less than the loan principal, you will have trouble refinancing without funds to pay down the loan principal. Some financing products, such as an FHA streamline refinance, do not require an appraisal and thus make this less of an issue.
5. Qualification Criteria
Every financing program has certain criteria and restrictions. The following is a list of common factors:
- Loan-to-value Ratio
- Credit Rating
- Type of Property
- Loan Amount
- Percentage Savings Resulting from the Refinance
- Need for Non-occupant Owners
- Mortgage Insurance Amount and Duration
Florida Refinancing Considerations – The Next Step
As you see from the 5 loan refinance considerations above, assessing a refinance encompasses more than comparing interest rates. It requires consideration of personal factors along with evaluation of all options. A knowledgeable loan officer can assist you with these varying pieces of information and assist you with making an educated decision. For more Florida refinancing considerations, contact Sonny Solomon at The Keyes Company.