Refinancing your home mortgage is a great way to reorganize your monthly payments. It can also help you save money by lowering those payments. However, before you go that route, it’s essential to know if refinancing a home mortgage is the right move for you. Here are four financial things to know when refinancing.
1- Know How Much Equity You Have
It’s essential to know how much equity is in your home. This can give you a better idea of whether you should refinance your mortgage. If your home is worth less than when you first started your mortgage, it’s not worth it. However, if your home’s value is greater than when you first took out the mortgage, it’s well worth refinancing.
With the pandemic’s start in March 2020, many properties experienced increases in their equity. As a result, homeowners have been able to take advantage of the market situation and refinance so that their mortgage payments are more affordable. Overall, if your home equity is at least 20%, you can refinance.
Your loan is often determined based on an appraisal of your home. This can help you have an idea of the value of your home. However, the loan-to-value ratio should never be more than 80%.
2- Consider Why You Want to Refinance
Of course, you should consider why you want to refinance your home mortgage in the first place. What do you want to get out of refinancing? Your current mortgage is then paid off, and you acquire a new mortgage loan. Refinancing is intended to benefit you in some way that your previous loan did not accomplish. Perhaps you want to get lower monthly payments or a more favorable interest rate. Whatever the case, it’s essential to know why you want to refinance your home mortgage. Making a list – regardless of whether it’s a tangible list or a mental one – is wise. It can help you to make an educated decision.
3- Know Your Credit Score
It’s essential to know your credit score before refinancing your home mortgage. You should obtain copies of your credit report and look them over for possible errors. If you do find anything that appears wrong, you should immediately report it to the credit bureau to have it removed or fixed.
If your credit score is in good shape, you can move ahead with refinancing your mortgage. If it’s poor, you will want to first work toward improving your score before making such a drastic move. As a general rule, the higher your credit score, the better your odds are of qualifying for a more favorable interest rate and lower monthly payments. A credit score of at least 760 with a debt-to-income ratio of 36% or less is considered the best for securing those advantages when refinancing a home mortgage loan.
4- Know Whether You Can Break Even
You can benefit from knowing if you can break even when refinancing your home mortgage. If you plan on remaining in the home for the long term and your refinance costs less per month compared with the payments you made on your previous mortgage, the money you save allows you to recover those costs.
When you know these things, you will be in a much better position to refinance your home mortgage.
