Refinancing a Home
With interest rates at an all time low, many homeowners have begun to refinance older, higher interest loans. Refinancing has the potential to save homeowners thousands of dollars a year in mortgage payments. Before you apply to refinance a home loan at your local bank, there are several things you should know first.
Equity
Since the housing recession began, banks have tightened their lending standards considerably. Most now require that a homeowner have at least 20% equity in their home before they will underwrite a new loan. For a home that appraises at $100,000, that would mean a homeowner could owe no more than $80,000. This is the single biggest impediment for homeowners since the housing recession has wiped away considerable value from most dwellings. Nevertheless, you should still apply for refinancing as there are some low equity FHA, Fannie Mae and Freddie Mac programs that may accept you.
Credit Score
Credit score is another important factor in qualifying for a new home loan. Loan rates operate on a sliding scale with the lowest rates going to borrowers with credit scores of 720 and higher. Those with scores of 620 and lower will have a hard time qualifying for a new loan.
Payback Period
How long you plan to stay in a home will determine if you SHOULD try to refinance. Most loans come with costs of 3-6% of the loan value. In our previous example, $80,000 x 3% = $2400. If by refinancing you’re able to save $100 per month, the payback period would be $2400/$100 = 24 months. That means you would need to stay in your current home two (2) years before you begin to realize savings on your refinanced mortgage.
So what kind of savings can you realize by refinancing now? Assuming you qualify for the best prevailing interest rates and you have sufficient equity in your home, the average national rate for a 30 year fixed loan is 3.92% (according to bankrate.com). In our previous example, an $80,000 loan would carry a principal and interest payment of $378/month. That same payment at a rate of 4.92% would be $426/month and $476/month at 5.92%. As a rule of thumb, for every $100,000 of loan value, a savings of 1% would be $60 per month. Over the life of a 30 year loan, that savings is a whopping $21,600 for every 1%!
