Wondering if You Qualify for Refinancing?
hand press on refinancing button on virtual screen
If you are a homeowner or even make payments on your car loan then you have probably been approached about an option to refinance your loan. Refinancing is simply financing your home or automobile again at different loan terms, usually at a lower interest rate. For most homeowners, this is a good idea if rates drop significantly lower than what they current have. Refinancing can mean a savings of $100 or more per month depending on the loan terms and this is significant for anyone living within a strict budget. Refinancing, however, is not available to everyone. There are certain criteria that must be met in order to refinance.
- Do you hold at least 20% stake in your equity? – Your lender will likely want to see that you have a significant amount invested into your equity, usually 20% is ideal. To determine the amount of equity you have, divide the principal amount that you are trying to borrow by the value of your home. (Example: Your home is valued at $300,000 and you want to borrow $200,000, you have a loan-to-value ratio of .66 or 67%. This means that you have a 33% equity position in the home. If your mortgage is backed by Fannie Mae or Freddie Mac you may be able to qualify for federal programs to help you refinance without having a 20% equity in the home.
- Do you have a good credit score? – Most lenders require a minimum score of 600 to 650 to approve refinancing applicants while some lenders (credit unions and banks) look for scores of 720 or above. It is important to remember that the breakdown of your credit score comes from five different factors, payment history (35% of your score), utilization (30%), length of credit history (15%), new credit lines (10%), and the types of credit you obtain (10%). By checking your credit score and report, you can monitor your report often making sure that there are no discrepancies.
- How much debt do you have? – When a lender analyzes your debt-to-income they are looking at all of the monthly payments you pay. This includes your mortgage, credit cards and car loans relative to your income. They typically want to see ratios no higher than 38%. Mortgage underwriters want to see the mortgage component of your debt (your monthly mortgage payment) stay within 28% to 30% of your total take home pay. If you take home $4,000 per month you should not spend more than $1,200 a month on your mortgage payment. Every lender does have different requirements, so you are not automatically excluded from the opportunity to refinance if your DTI is above 38%. It is best to check with your mortgage lender for the specific guidelines and requirements.
Refinancing your home is a great option if you are looking to reduce your monthly mortgage payment. It can free up some extra money each month and allow you to use that towards other expenses. If you are interested in refinancing or would just like some more information on how First Ohio can help put a little bit of money back into your pocket, contact us today!
