9 Things to know before you refinance your mortgage

What is Refinance Mortgage Broker?

Refinancing your mortgage is a perseverance that can have a significant impact on your finances. While you can go to a bank to refinance your mortgage, it can be a time-consuming and complicated process. That’s how a mortgage broker comes in.

A mortgage broker is a professional who acts as an intermediary between you and potential lenders. They work with a network of lenders to find the best mortgage rates and terms that suit your financial situation.

Switching Home Loans or Refinancing your home loan to take advantage of a lower interest rate might save you money.

1. Private Mortgage Insurance

Homeowners who have less than 20% equity in their home when they refinance will be required to pay private mortgage insurance (PMI). If you are already paying PMI under your current loan, this will not make a big difference to you. However, some homeowners whose homes have decreased in value since the purchase date may discover that they will have to pay PMI for the first time if they refinance their mortgage.

2. Credit Score

Lenders have tightened their standards for loan approvals in recent years. Consumers with very good credit will not always qualify for the lowest interest rates. Borrowers with lower scores may still obtain a new loan, but they may pay higher interest rates or fees.

3. Rates vs. the Term

While many borrowers focus on the interest rate, it’s important to establish your goals when refinancing to determine which mortgage product meets your needs. If your goal is to reduce your monthly payments as much as possible, you will want a loan with the lowest interest rate for the longest term.

4. Home Equity

The first thing that you will need to review is to calculate how much equity is in your home. If your house is now worth less than it was when you began your mortgage — known as being in negative equity — then it doesn’t make sense to refinance your mortgage.

5. Refinancing Points

When you compare various mortgage loan offers, make sure that you look at both the interest rates and the points. Points — equal to 1% of the loan amount — are often paid to bring down the interest rate. Be sure to calculate how much you will pay in points with each loan, as these will be paid at the closing or wrapped into the principal of your new loan.

6. The Costs of Refinancing

Refinancing a home usually costs 3% to 6% of the total loan amount, but borrowers can find several ways to reduce the costs (or wrap them into the loan). If you have enough equity, you can roll the costs into your new loan (and thus increase the principal). Some lenders offer a “no-cost” refinance, which usually means that you will pay a slightly higher interest rate to cover the closing costs.

7. Know Your Breakeven Point

An important calculation in the decision to refinance is the breakeven point: the point at which the costs of refinancing have been covered by your monthly savings. After that point, your monthly savings are completely yours. If you intend to move or sell your home within two years, then a refinance under this scenario may not make sense.

8. Know Your Debt-to-Income Ratio

If you already have a mortgage loan, you can assume that you can easily get a new one. However, lenders have not only raised the bar for credit scores but also become stricter with debt-to-income (DTI) ratios. While some factors — such as having a high income, a long and stable job history, or substantial savings — may help you qualify for a loan.

Overall, your DTI ratio should be 36% or less, although, with some additional positive factors, some lenders will go up to 43%.

9. Taxes

Many consumers have relied on their mortgage interest deduction to reduce their federal income tax bill. If you refinance and begin paying less in interest, then your tax deduction may be lower. It’s important to keep in mind that few people view that as a good-enough reason to avoid refinancing.

However, it is also possible that the interest deduction will be higher for the first few years of the loan (when the interest portion of the monthly payment is greater than the principal). Increasing the size of your loan, as a result of taking out cash or rolling in closing costs, will also affect how much interest you will pay.

For matters related to Refinance or switching loans connect to our professional and friendly local mortgage brokers team at 0403 803 470