A home loan refinance is about striking at the right time, particularly when it comes to interest rates, home equity, and your financial and living situation. Refinancing without carefully considering these factors (and more) could end up not being in your best interest (so to speak) once it’s time to reach out to a lender.
So before you decide that a refi is the right move for you, ask yourself these five questions:
1. What’s my financial goal?
It’s important to ask yourself this up front—because the reasons to refinance come in several different forms. With a home loan refinance, you could:
- Consolidate debt – such as high-interest credit card debt
- Get cash out for major expenses – such as home improvements or college tuition
- Shorten your loan term – such as refinancing from a 30-year to a 15-year fixed
- Lower your monthly payment – such as refinancing to a lower rate
2. Do I have enough home equity built up?
Home equity is fundamental to refinancing – it’s the difference between the property’s current value and the amount you still owe on the loan.
When it comes down to it, “enough home equity” means a few different things. If you have a conventional loan, you’ll need to have at least 20% equity built up to qualify without having to pay private mortgage insurance (PMI). However, if you have an FHA loan, you you’ll need to have a minimum of 2.25% equity.
Keep in mind: For some homeowners, adding PMI to their refinanced loan could nullify the benefits of a refi.
3. What’s my credit score?
Your credit score is just as important to qualify for a refi AND get a good rate as it was when you first bought your home. But it all depends on the loan. Consider this breakdown:
- FHA loan: Typically, you’ll need a minimum score of a 580, with more favorable terms for those with 600 or above. It’s also dependent on the type of FHA refinance.
- VA loan: The VA does not require a minimum credit score for a refi, though many, if not most, VA lenders look for a score of 620 or greater.
- Conventional loan: Many lenders will accept a minimum score of 620 to 680. But that’s just to qualify. The best rates are usually given to scores of 740 and above.
4. How much will I spend in closing costs?
Your closing costs are dependent on several factors, including the purchase price of the home and the loan you’re refinancing. Generally, you can expect to pay between 2% - 5% of the loan amount. So if your refinanced loan is $150,000, your closing costs would be between $3,000 and $7,500.
5. When will I break even?
It’s crucial to determine how many months or years it will take until the benefits of your refi outweigh the costs. To calculate the break-even point, divide the refinancing costs by the amount you’ve lowered your monthly payment.
For example: If the refinance will reduce your monthly payment by $175, but the closing costs end up being $3,500, it will take you 20 months to break even. So if you’re thinking about moving in a couple of years, it might not make financial sense for you to refi.
Once you’ve answered these five questions, and if all signs point to a refinance, your next move is to find a mortgage lender who fits your needs. Click below to see if ditech is the right match for you.
Ditech is not a financial advisor and the ideas outlined above are for informational purposes only. They are not intended as investment or financial advice and should not be construed as such. Consult a financial advisor before making decisions regarding important personal financial matters, and consult a tax advisor regarding the deductibility of interest and tax implications.