Average mortgage rates have been declining since the Coronavirus (COVID-19) pandemic first prompted stay-at-home orders in March. With rates as low as they’ve been in recent history, demand for mortgage refinance has spiked. For homeowners experiencing financial difficulty during this time, refinancing could help you lower your monthly mortgage payment, making it easier and more affordable for you to stay in your home until economic conditions improve. For homeowners with enough equity, a cash-out mortgage refinance could give you the funds you need to finally check those renovation projects off your list.
Are you wondering if a mortgage refinance is worth it for you? TFB Mortgage Lender, Gibb Shelton, offers some insight on refinancing during this time:
“I have had some recent discussions with housing agency economists. One thing they all mention is that this is truly an unprecedented time to refinance. When some of these current issues are behind us, you will be able to say that you accomplished one major financial goal.”
In this article, we’ll cover the most important factors to consider to help you make the best decision for your needs. Still have questions? Our friendly and experienced Northern Virginia mortgage lenders are happy to help!
Mortgage Refi Questions To Ask Your Lender
When you make an appointment to talk to a mortgage lender, the more information you can provide, the better advice we can give you. Here are the most important questions to bring up with your lender.
What Is My Credit Score?
The higher your credit score, the better your interest rate will be. In general, 760 or above is an optimal credit score. If yours is lower than 700, you may want to spend some time working to raise it before applying for a refinance.
What Is My Home’s Equity?
Equity is the difference between the current market value of your home and the amount you owe on your mortgage. For example, if your house is worth $250,000 and you owe $175,000 on your mortgage, you’d have $75,000 in equity.
Generally, you should have at least 20% equity before refinancing. Keeping that margin saves you from having to pay for Private Mortgage Insurance. It also protects you from being “underwater” on your mortgage, meaning you owe more than the house is currently worth.
What Is My Debt-To-Income (DTI) Ratio?
Your DTI ratio is a personal finance measure that compares your total debt to your gross income. Calculate your DTI by dividing your total recurring monthly debt by your gross monthly income. For example, if you have $1,500 in monthly car loan, credit card, and/or mortgage payments and your gross monthly pay is $6,000, your DTI would be 25%.
Lenders typically look for DTIs of 28% or lower. If you’re concerned about DTI, talk to us. We can help you figure out the right move.
How Much Will I Save?
The answer depends on a variety of factors, such as your current loan rate and term, as well as how long you plan to stay in your home after refinancing. There are also different ways to save money:
- Longer term: If you extend your current loan term while refinancing the same amount of debt, your monthly payments will be lower, saving you money in your budget.
- Shorter term: If you refinance the same amount of debt to a shorter term, such as 15 years, you’ll have a larger monthly payment but pay less interest over the life of the loan.
- Lower rate: Of course, people tend to refinance when rates go down, not up. To figure out how much you’ll save on interest, ask your lender to help you calculate the difference between what you currently would pay in interest over the life of your mortgage and what you would pay with your new refinanced mortgage. Then subtract the closing costs with your refinance from the interest savings.
What Type Of Refinances Are There?
Rate and Term Refinances: With this option, your monthly payment changes without changing your principal balance. You can potentially lower your monthly payment and/or the amount of interest you pay over the life of the loan.
Cash-Out Refinance: This refinance option allows you to accept a higher loan balance in exchange for taking cash out of your home equity. You borrow more than you owe on your mortgage and pocket the difference to use for a variety of expenses, such as a home renovation.
Federal Home Loan Programs: We can help you refinance government-insured mortgages such as FHA Loans, VA Loans, and USDA Loans. Refinance into another federal home loan or a conventional mortgage.
When Should You Refinance Your Mortgage?
Here are the most common situations when a mortgage refinance makes sense. Talk to your lender about your specific situation for more personalized advice.
- You want to get out of a high-interest rate loan. If you want to drop a higher rate loan to take advantage of a lower rate, you should refinance. However, this is only a good idea if you are planning to stay in the house long enough to make the additional fees/closing costs worthwhile.
- You need cash. If you want to tap into some of your home’s equity to borrow money at a low rate, a cash-out refinance could be your best option. This cash can be used to consolidate credit card debt, pay for home renovations, or cover other major expenses.
- Your credit score has improved. Your credit score is a major factor in the interest rate you receive on your mortgage. If you’ve worked on improving your credit since your term started, it could be worthwhile to explore refinancing loan options with your new credit score and compare the savings.
When Shouldn’t You Refinance Your Mortgage?
Here are two situations when a mortgage refinance may not make sense. Talk to your lender about your specific situation for more personalized advice.
- You don’t plan on staying. Because a mortgage refinance comes with closing costs, you should plan on staying long enough to at least break even.
- Your credit needs improving. If your credit isn’t where it should be and could use some work, you could have trouble finding a lender who will be willing to work with you on a refinance. If you do manage to get a loan the rate could be higher than normal.
Contact a TFB Mortgage Lender Today!
Our friendly and experienced mortgage lenders in Fauquier County and Prince William County are here to help with all your home loan needs. To learn more about your refinancing options and review our current mortgage refinance rates, contact us today! You can also complete our online mortgage refinance application–it only takes 15 minutes!