What To Consider When Refinancing Your Home

Think that you want to refinance your home, but have never done it before? It may help to know the following things to help ensure that the process goes as smoothly as possible.

Your Credit Score Will Be Pulled Again

You may have had a great credit score when you originally got a mortgage for your home, which resulted in a low-interest rate. However, you will have your credit score pulled again when refinancing your home. If you have taken on new debts since your original mortgage or your credit score has declined, that can impact your ability to refinance or your interest rate. That's why you'll want to make sure your lender pulls your credit report for the three main bureaus so that you get the best possible look at your credit history.

You May Need A Lower Loan-To-Value Ratio 

Another factor that will impact your refinance is your loan-to-value ratio, which is how much cash you are getting out of the refinance. Be aware that your lender may have a limit on how much money you can have for a refinance. For example, they may state that you can't hold onto more than 80% of the home's value in cash.

One factor that can alter your loan-to-value ratio is your debt-to-income ratio. Refinancing means that you must meet the same requirements for your debt-to-income ratio after a refinance, even though you will still have a loan on all the same assets as before and are paying them off. This may require you to lower your loan-to-value ratio so that you have a lower monthly payment, and lower your debt-to-income ratio low enough so that you qualify for a refinance.

You Should Calculate Your Break-Even Date

There are pros and cons to refinancing a home, which is why you want to work with your mortgage lender to determine your break-even date. This is when the lower interest rate and the closing costs associated with the refinancing will end up saving you money in the long run of paying off your home. If you do not plan on staying in your home past the break-even date, then it may not be worth it to you to refinance since you will not see any financial gains.

Still have questions about the process of refinancing your home? Reach out to a mortgage lender in your area for more information about this important financial decision.