Refinancing your mortgage can be challenging, but it can be exciting as well. By refinancing, you may be able to take advantage of lower monthly mortgage payments. Investing in mortgage protection insurance safeguards your family in event of your untimely death. When searching for mortgage protection insurance, you should always shop around for competitive quotes to get the best deals.
However, the mortgage-refinancing process will require that your lender reassess the value of your property. The changes to the value of your property may have a direct impact on how much you pay for your home insurance.
Things to Know Before You Refinance Your Mortgage
You need to first determine how much equity is in your home. If you have negative equity, meaning your home is worth less today than when you first took out your mortgage, then refinancing doesn’t really make any sense.
Next, you should determine your credit score. If you want to enjoy the lowest rates on the market, then you will need a credit score of at least 760. Note that you can still qualify with a lower credit score. However, you may need to pay higher fees and interest rates in order to qualify.
Your debt-to-income ratio is also paramount. Ideally, your monthly property payments should not exceed 28% of your monthly income (gross, not net). Overall, your debt-to-income ratio should be below 36%.
However, certain positive elements may entice your lender to increase the threshold to 43%. In any event, we would suggest that you pay off some of your existing debts before applying for refinancing.
Additionally, refinancing costs need to be considered. Home refinancing will usually cost 3% to 6% of the total amount of the loan. You may be able to augment the principal by rolling the costs into the loan if you have sufficient equity to do so.
No-cost refinancing is offered by certain lenders on the market. You will need to pay a slightly elevated interest rate, though, in order to take care of the required closing expenditures. Perform the necessary due diligence in order to find a lender that offers terms that are beneficial to you.
Refinancing points are also something to look into. Points are the equivalent of 1% of the loan amount. Points are usually used in order to lower interest rates. You should take the time to determine how much you will pay in points with each loan offer before you go any further.
The breakeven point is another crucial factor. The breakeven point refers to the stage at which the refinancing costs have been covered by your savings. For instance, if it will cost you $3,000 to refinance, and you will be saving $100 per month over your first loan, then it will take you 30 months to recoup your losses.
Taxes are also something to consider. Many homeowners have turned to their mortgage interest deduction in order to lower their income tax payments. If you opt to refinance and start paying less interest as a result, then your tax deduction may also be lower in such a scenario.
As well, you need to think about mortgage insurance. If you have less than 20% equity in your property when you refinance, then you will need to pay private mortgage insurance as a result.
What happens to my home insurance when I refinance?
During the refinancing process, your lender will reassess the value of your property. You also need to determine what your lender requires on your end. For example, if you are situated in a flood area, then your lender may demand that you obtain flood insurance. Your homeowner’s policy should cover the costs needed to furnish and rebuild your entire home in the event of a disaster.
Any unique details or features should be included in the estimated cost. You need to speak to your lender in order to ensure that the policy covers the total amount needed by your financial institution in order to qualify for the loan.
Regardless of the situation, however, refinancing your mortgage should not be something that you take lightly.
How to Refinance Your Mortgage
You first need to set a realistic goal as to why you want to refinance. Evaluate your credit score in order to determine if you can obtain the lowest rates in the industry or at least qualify. Then, compare and contrast the rates of multiple lenders before you settle on one.
Once you have chosen the ideal lender, lock in your rate. Next, you need to get ready to actually close your refinanced loan. Attend the mortgage refinance closing and sign any papers in order to finalize the process.
Taking the First Step
Mortgage refinancing may allow you to negotiate better terms with a lower rate when you take on your new loan. Ultimately, having a good credit score will help you enjoy the lowest interest rates in the market.
Generally speaking, the amount you can borrow via refinancing is up to 80% of the home equity that you have built.
Sources:
Homeowner’s Insurance and Your Refinance: What You Need To Know | Reali
9 Things to Know Before You Refinance Your Mortgage (investopedia.com)
Mortgage Refinance – TD Canada Trust
