Refinancing Factors to Consider

Factors to consider before refinancing your home

There are some factors which need to be considered before the refinance option is exercised, and unless proper thought is not put in and a hasty decision is taken for refinancing the home, chances are that it will create more trouble for you later on, and hence a well-thought decision needs to be made when considering a refinance. If you are looking for better deals, to be even considered as a viable option the deal needs to have the mortgage interest rate at least one point less as compared to the existing mortgage interest. The other thing to be considered is to check whether the loan has an adjustable rate of interest, which coupled with the negative paying back or interest only loan is preventing you from building equity into your home. Considering the fact that current mortgage rates are at a historical low, it makes good sense to refinance a home loan in these slump times so as to get a good deal.

Another important thing to be considered is that you have at least 20 percent or more equity in the home, because in this case, the debtor can be benefitted though the reduction of PMI or the private mortgage insurance. The PMI is a kind of insurance which had been added to many loans where the debtors did not put at least 20 percent capital as down payment for the collateral. There are options whereby the additional insurance provided by the PMI can be exchanged with the banks, and this elimination of PMI amount can not only help in decreasing the monthly payments, but also help in reducing the refinance rate since the interest component of PMI gets eliminated.

Yet another thing to evaluate would be the debt to income ratio of the debtor. If this ratio is high, and the debtors want to refinance their homes, then for improving their credit scores, they may need to show additional income and lower the minimum monthly payment, by incurring fewer costs on the basic bills. The good credit standing is very important and coupled with a low debt to income ratio; it would qualify the debtor for lower interest rates in all forms of financial transactions involving debts like refinance, mortgage, credit cards, insurance etc. Lowering the bills and reducing the ratio for a short-term will lead to long-term benefits in terms of mortgage rates.

Unforeseen or uncalculated larger expenses should also be considered before deciding the repayment tenure for the refinancing. If a big one-time out of pocket expense like huge medical bills or cost of education for children need to be footed, then with a proper planning, it is more affordable to take the money out for refinancing your home instead of securing additional loans. In such cases, having an option which allows repayments over a long period of time like say 30 years would be more suited, and as the time window for the repayment is so huge, even if the total cost may be substantially more in the long run, you can settle the debts with lower installments. Nevertheless, you should always first calculate your profits against your savings and then make a decision.

Considering the above facts, provided you have done your research well, you may be able to have substantial benefits from a refinance loan. The prospective refinancer should also understand the various fees and other charges which will be charged by the lenders, when they discuss the deals with the prospective lenders. It has to be taken care that the same benefits may or may not be made evident to you in your discussions with your mortgage brokers or lenders, since they usually have their own personal interests to cater too. The simple solution to this problem is to keep looking at all available options and improving the credit scores. Ensuring these two things are done properly can help you save hundreds of dollars per month and hence reduce the overall refinance costs. Once this is done, you can plan to save for the next installment and ensure that you do not increase the spending till there is enough liquidity with you for the next refinancing loan.

Updated: Jan 7, 2011 9:50