Should I refinance? It’s a question many homeowners are asking themselves now that refinance rates are near all-time lows. You hear about it on TV, from your friends and family members. And if you have a higher-than-you’d-like interest rate on your home, you’ve probably considered it. But how do you know if the time is right to refinance? Ask yourself the same questions a lender will ask you, to help answer the question: “Should I refinance?”
1. What is Your Debt-to-Income Ratio?
You probably heard plenty about DTI (debt-to-income) ratios from your lender when you first purchased your home. With your refinance, many of those same issues will come up again, and hopefully this time, you’re in an even better place. That will be true if you’ve been paying down your debt or increasing your income. A reasonable DTI is less than 40 percent, and lenders will probably push for something even as high as 36 percent. If you’re debt has gone up or you’ve been laid off, then your DTI will probably not make the cut.
2. Have You Been In Your Job for More Than Two Years?
Longevity in your field is one of the requirements for a mortgage refinance. Hopefully, this won’t be a problem, but if you’ve experienced a lay off, then even though you may desperately need a refinance, the lender probably won’t consider you.
3. What is the Loan-to-Value Ratio On Your Home?
If your home is one of the thousands underwater, LTV, or loan-to-value, ratio is a phrase you’re all-too familiar with. This term refers to the amount you owe on your home versus how much it is worth on today’s market. If you owe more than it’s worth, your home is underwater, and the HARP 2.0 program may offer your only solution to this problem. However, if your home has an LTV of 90 percent or less, you can probably qualify for a traditional home refinance.
4. What is Your Credit Score?
You knew this one was coming, didn’t you? Of course the lender will pull your credit report all three of them, in fact. They will want to see that you are current on your debts and that by essentially offering you a new home loan, they are doing business with someone who is a good credit risk. Use Credit Sesame to get your credit score beforehand to see where you stand. If your score is 760 or higher, you’ll have no problem qualifying for the best interest rate and terms. If it’s a little lower, your chances are still good but you may not qualify for the lowest interest rate. However, if it’s considerably lower, below 650, you may want to consider taking some time to focus on improving your credit score before you apply.
Knowing what you bring to the table before you go to the lender makes you a player at the table instead of just accepting whatever they tell you.