The recent housing crisis has caused interest rates to drop down to the lowest they have almost ever been. This has caused many homeowners to consider the benefits of refinancing their existing mortgage at a lower interest rate. While this may a good idea if you are interested in lowering your monthly payment, there are some things that you should take into consideration before refinancing your existing home loan.
One of the first things that lenders look at on any refinance application is the LTV of the borrower. Your loan-to-value ratio is a way that lenders look at your home’s current value. If you are trying to borrow a particular amount, your home should have at least the amount you are trying borrow in value. If you have a higher LTV you won’t automatically be denied when you attempt to refinance your loan, but you will more than likely be required to purchase mortgage insurance which is designed to protect the lender in the case that you default on your loan.
The next thing that lenders look at when examining your refinance application is your debt-to-income ratio or DTI. This is used to measure your ability to pay your outstanding debts. Many lenders are flexible when it comes to your debt-to-income ratio but is you currently have a high amount of debt you may find it difficult to refinance your existing mortgage. To lower your existing DTI you will need to pay off some of your existing debts.
The third thing that can hurt you when you are trying to refinance is having a credit score that is too low. Many lenders will be willing to work with you if you have a credit score of 660 or higher. That percentage drops as your score gets lower, if your score is below 620 you will find that many lenders are not willing to refinance you. The lower your credit score is, the more difficult it will be for you to find a lender who is willing to work with you. Even if you do find a lender who is willing to refinance your loan with a low credit score, you are more than likely going to pay more because of the adjustments that lenders will place on your loan.
Each of these obstacles presents borrowers with hurdles that must overcome in order to successfully refinance their existing mortgage. If you find yourself in any of these situations, it may be better for you to settle and clear as much of your existing debt before you attempt to refinance your mortgage.