Refinancing a mortgage for a lower interest rate can be a great way to reduce monthly expenses and lower the overall cost of a home. There are a number of refinancing options available to consumers, but the mortgage refinancing benefits and process can vary between financial institutions. Generally, what it takes to refinance a mortgage is influenced by a few essential variables.
• Credit rating
• Debt to income ratio
• Equity in home
• Valuation of the home
• Individual cash flow
Online financial institutions may be able to offer better quotes with a digital network, however local banks may have better service. Also, as financially beneficial a mortgage refinance can be, it is important to keep in mind how the costs breakdown over time.
I: Assessment of the refinance terms
Before signing the contract for a mortgage refinance it is important to determine whether or not the refinance will be worthwhile and how much you will save, have to pay etc. To do this, calculate the amount of a refinanced mortgage and compare that to your current mortgage payment.
For example, if a current home valued at $225,000 has a monthly payment of $1363.49 and the refinance is for 5.4% the new monthly payment is $1263.44, however this does not include costs that may be built into the previous monthly payment such as annual property tax, hazard insurance, and mortgage insurance. If these additional costs add up to 30 basis points or .3%, then the monthly payment becomes $1305.90. Add to this refinance costs and principal lost to the resetting of the amortization schedule. Moreover, if the refinance costs are $2000.00 and included in the mortgage, the cost becomes $1317.51 per month.
In addition to the above, if the original mortgage is 5 years old and is reset to 30 years at the new rate, 360 new interest payments will become due on top of the 5 years of interest already paid. If the new amortized interest plus the previous 5 years of interest adds up to more than the previous mortgage at the 6,1% rate, then the refinance is not worthwhile. For these reasons, be sure to include enough percentage difference between the refinance and the existing mortgage to make it worthwhile.
II: Pre-qualification
Pre-qualification at a couple of well selected mortgage refinance facilitators can come with as little as a good credit score. The pre-qualification may also provide a prospective mortgagee with several competing quotes. However, pre-approval for a mortgage requires more documentation than pre-qualification. Typically a mortgage refinance requires the applicant to demonstrate debt to income ratio, net asset value, gross annual income, tax compliance, and property details such as assessed value, title deed, and insurance.
III: Choosing a bank
Choosing between a local bank and online banks for mortgage refinancing is an important decision in the home refinancing process. If your local bank provides good service, knows you and has interest rates as low as online financial institutions or refinance quotes, this bank may be a better choice. This is because for something as expensive and involved as a mortgage, it can be helpful to have the face to face and telephone contact in addition to proximity in the case of sorting out personal financial details.
IV: Refinance planning
In a New York Times interview by Bob Tdeschi with mortgage industry experts Regina Garlin and Nicholas Bratsafolis, Bob Tedeschi highlights the relevance of timing when applying for home refinancing. Moreover, Tedeschi’s interview brings up the concern that mortgage refinances could fail or not be worthwhile because mortgage rates will not stay at historical lows forever, and home equity values may drop below a point required for the refinance to be approved. In other words, mortgage processing times themselves can take up to 3 months, in which time the value of a home’s mortgage may drop below the traditional allowable refinance.
To illustrate the above point, if your home currently has an assessed value of $275, 000.00, and your current mortgage is for $260,000.00, the real estate’s value may be getting too low for the bank to approve a traditional refinance. You may also want to keep in mind the affect of refinancing cost on the mortgage application if that cost is included in the refinance value. The reason for this consideration is that the mortgage value may rise above assessed value after these refinance costs are included.