The pandemic has created many changes in the economy, including mortgage rates that have experienced one of the largest increases on record in 2022. Many homeowners are currently paying a rate below 4%, and unless they can lower their rate by at least 0.75 percentage points, it may not make sense to refinance. However, with recent signs of stability in mortgage rates ending last year below the 7%-plus peak from earlier in the year, now might be a good time for some homeowners to consider a refinance option. If you're wondering whether or not you should take advantage of current conditions and refinance your home loan, there are several factors to consider before making a decision.
Eligibility Requirements
Before taking the plunge into mortgage refinancing, be sure to check that you're eligible! Every lender has their own criteria when it comes to who they'll work with - make sure you have all your ducks in a row and meet those requirements before applying. Regardless of who you choose, they'll request details about your income, credit score, and assets – among other things! To make sure all goes according for a successful application process at most lenders, a higher credit score (620+), 20% equity in home ownership, and an up-to-date debt ratio (43%) will give prospective refinancers the best chance of success.
Fees Associated With Refinancing
Second, take into account any fees associated with refinancing. Closing costs such as appraisal and processing fees can add up quickly and cut into any savings from taking out a new loan with a lower interest rate. If there are prepayment penalties on your existing loan, those too should be factored in when considering whether or not to refinance.
When refinancing, most people should expect to pay between 2% - 6 % of the loan's value. This cost covers a variety of services and fees such as an application fee charged by your lender regardless if you are denied or not; appraisal charges ranging from $300-500 depending on location; attorney fees based upon where they reside and also title searches performed during the refinancing process.
Loan Terms
Finally, consider how much you will save in interest over the life of the loan. This is a key factor that can help you determine if it's worth it to refinance your current mortgage. It's important to note that the longer you plan to stay in your home, the more likely you are to benefit from a lower rate, as more of your payments go towards principal rather than interest.
Final Thoughts
Ultimately, refinancing is a big decision and not one to take lightly. If you do decide to look into it further, make sure you understand all of the details before signing on the dotted line so that you can make an informed decision about what will work best for your particular financial situation. Good luck!
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