Sunday, May 17, 2009

3 Things to Know Before Applying For Mortgage Refinancing

Interest rates affect everyone, but no one feels the affects of interest rates more than a homeowner.

When was the last time you examined your current home mortgage interest rate? If it has been more than 2 years, you will definitely want to consider refinancing. Before you pick up the phone to speak with a lender however, it is a good idea to go through a few simple steps to determine if the call to your local lender will be justified.

Mortgage Rates and Current Length of Loan

The first step in determining the feasibility of refinancing your home mortgage is to locate your current loan documents to determine two things: 1) what is your current interest rate, and 2) how much longer is your current mortgage going to exist.

If your mortgage is an old one and only has few years left, most of your payment is now going towards principal. Refinancing this type of mortgage is not advised because the costs of acquiring the mortgage itself will negate the money saved. Work hard to pay off an old mortgage as quickly as possible. If, on the other hand, your mortgage is less than 10 years old and the interest rate is at least 1% more than the current lending rate, then your home is a prime candidate for refinancing.

Equity, FICO Score and Debt to Income Ratios

The next step is to compile an assessment of your ability to get a new loan on your property. This assessment will include: 1) determining your FICO score, 2) calculating the current equity in the property, and 3) calculating your current debt to income ratio.

Your FICO Score

Today, lenders can quickly determine the credit worthiness of a potential borrower by checking just one number: your FICO score. A FICO score is a number, generally in the range of 500-850 with 850 being the absolute best number. Banks would prefer individuals with pristine credit, but there are many lenders that deal with borrowers in the mid and even low ranges. Remember: interest rates make or break a home mortgage, so the lower your credit score, the more you will pay in interest for your home. Take every step you can to raise your credit score before speaking with a lender.

Calculating Current Home Equity

The next step is to determine if a lender will be willing to take a risk lending money against your home. This involves simple math. Calculate what your home is currently worth in your market and then subtract what you owe. The difference will be your "equity". Banks like to see borrowers with equity simply because if they get stuck with the home due to foreclosure, they will be able to recoup the money they lent on the property. If your equity is less than 10%, you may want to consider waiting for the market to recover thereby raising the value of the home and your equity.

Debt to Income Ratio

The next crucial step you'll need to complete before speaking with a lender is to determine your current debt to income ratio. This percentage is easy to calculate. Simply add up all of your monthly payments for housing, credit cards, student loans and car loans and divide by your total income.

For example, if your take home income is ten thousand dollars per month, and you pay a total of twenty five hundred dollars in monthly debt obligations, your debt to income ratio is 25%. Lenders like to deal with borrowers whose debt to income ratio is low or at least within reason. Anything over 40% is pushing the limits of what most banks (especially these days) will consider as a reasonable risk. If your debt to income ratio is high, begin today to pay off those pesky credit cards and car loans. When you do, you will see your debt to income ratio begin to fall.

Obtaining a new mortgage or refinancing a home does not have to be difficult. Preparation is the key. Follow these three simple steps before speaking with a mortgage broker and you will be much more informed on your chances of obtaining a refinancing mortgage on your home.

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