Rules of Refinancing Mortgages
There are certain rules and guidelines that you must abide by in order to refinance your mortgage. Falling short in one or two of the categories may give a lender just cause to disqualify your application. Every lender will not have the same criteria. Contact several lenders and make a list of their stipulations and guidelines to see which one will help you meet your financial needs. You may want to consider a lender that is cost effective and has a reputation for quality customer service.
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Credit Application
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A lending officer will have to take a new credit application which includes your name, address, Social Security number, date of birth, place of employment and income. This information will be needed for all co-applicants as well. Refinancing means you must still qualify based on your lender's criteria and guidelines. Make sure you have all of your information such as income verification and other documentation.
Equity/Appraisal
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Your home will need to have a certain amount of equity. Some lenders will loan or refinance up to 95 percent of your home's market value. The exact amount can vary from lender to lender. To determine the exact amount of equity you have in your home a lender will have an appraisal done. The cost for an appraisal can range from $300 to $700. This will be one of the costs you incur if you want to refinance. Home values can change significantly based on what is going on in the economy.
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Debt Ratio
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You will need to have your income and debt ratio evaluated. In order to qualify for a refinance your debt ratio should be somewhere in the area of 40 percent, (monthly debt/monthly income), which should include your new payment. If you debt ratio is higher than 40 percent it will be difficult to get your loan application approved. Refinancing may not help your situation. Your new payment should be comfortable and affordable.
Credit Score
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Your credit score has to be considered. If your score is low you may be disqualified from receiving a low rate of interest. The interest rate you qualify for will determine the amount of finance charges you pay over the life of the loan. A rate of 8 percent versus 6 percent can cause you to pay thousands of dollars more in finance charges. Get a copy of your credit report, prior to refinancing, to make sure there are no items that you were not aware of.
Prepayment Penalty
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When you refinance, you could be subject to a prepayment penalty if it's included in your loan agreements. Most prepayment penalties are only for a certain period of time, such as three to five years. Lenders receive the majority of their interest income at the beginning of the loan. A prepayment penalty can discourage some borrowers from refinancing.
Closing Costs
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There will be costs incurred such as closing costs, appraisal fee, credit report, title search, and points. To refinance a mortgage a lender will incur costs which are passed on to the borrower. These costs can prove to be significant but could be worth your while if you receive a significant drop in your interest rate.
Make sure you plan on staying in your home long enough to recoup your expenses.
Lower Rate
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In general if you can receive an interest 2 percent lower than your current rate then you should refinance. This could save you thousands of dollars in finance charges during your mortgage term.
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