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At some point in your home ownership, you may be tempted to refinance your mortgage, especially if interest rates are lower than they were when you originally took your mortgage or if you think your home has gained equity.
Refinancing is very similar to applying for your initial mortgage. Because approval requirements can be subject to that lender, you can expect some things to be a bit different but for the most part, your approval process will be comparable to when you were applying for your existing mortgage.
But before you begin the process, you should do your homework and understand whether a refinance is really a good idea for you. Here are some things you should consider before embarking on a mortgage refinance.
Know Your Home’s Value
It’s important to know how much your home is worth in today’s market to understand how much equity you have. Homes with little equity have a more difficult time refinancing with conventional lenders but there are often government programs that you could consider. You will want to consult with a mortgage professional to understand your equity and your options.
Understand Your Credit Score
Lenders have tightened standards on loan approvals recently. Consequently, you may have been approved for your mortgage with a lower credit score in the past. Most lenders are looking for credit scores in excess of 760 for the most advantageous rates and terms. Now is the time to increase your score and to make any credit repairs necessary before you apply for a refinance.
Understand Your Debt-to-Income Ratio
Lenders have also become stricter with debt-to-income ratios recently so it’s important to understand where yours fits. Although lenders will make judgment calls if your income is substantial with a long and stable job history, they still are looking for ratios that don’t exceed industry standards. Some lenders consider higher ratios than others. This is when it’s important to have the advice of a California mortgage broker to consider the benefits or disadvantages of different lenders.
Consider the Rate Vs. the Term
Your interest rate is only one important component when it comes to the mortgage on your home. If the goal is to reduce your interest rate right now, you may want to consider the loan with the longest term. If the goal is to reduce the amount of rate over the entire term of the loan, you will want to consider the loan that will pay off principle as quickly as possible.
Consider the Costs of Refinancing
Because refinancing a mortgage is essentially taking out a new mortgage, you will have costs associated with it. This will differ from lender to lender but can fall between 3 and 5 percent of the loan amount. You also may have the ability to pay down an interest rate with points paid at closing.
It’s important to understand what your options are and establish a break-even point when considering a refinance. For instance, if your refinance costs $2,000 and you are saving $100 a month, it will take you 20 months to recoup those costs.
What About Your Income Taxes?
Your mortgage interest rate is a large deduction. How does a lower rate or a larger mortgage affect your income taxes?
If you have questions about refinancing your current mortgage in the Walnut Creek area or anywhere in the state of California, consult an expert. At Bridgepoint Funding, we would be glad to discuss your refinancing needs. Call us at (925) 478-8630 to speak with one of our professional California mortgage specialists.