Refinance: What are the factors that can your lower mortgage costs?
You must be salivating at the thought of current mortgage rates and a golden opportunity to lower your monthly mortgage costs by refinancing your house. However, are you aware of the factors that play a crucial role in lowering the same? If you answered no, then its time for you to get your basics right before applying for a refinance.
Mortgage refinance – Factors to watch out for
You need to factor in the following points while shopping around for an affordable mortgage refinance:
Term of your loan – Traditionally, 15-year fixed rate loans are found to be cheaper than 30-year fixed rate loans. As a result, yield curve with respect to mortgage refinance changes dramatically. In that case, you can even opt for a 10-year fixed rate loan so as to secure an affordable monthly repayment amount. For instance, you can take out 15-year mortgage loans that are available at 0.5% lower rate of interests as compared to the rates of 30-year ones.
Size of your loan – In case you are forced to take out larger than usual amount of mortgage loan, then you’ll have to pay 3 quarters of a percentage point more as compared to rates of a jumbo loan. This is because once your loan amount crosses the conforming limits set by the mortgage regulators it ceases to be a regular loan and that it is considered a jumbo loan. However, there are some small loans that come at steep rate of interests as well. This is because lenders do not see handsome profits coming out of such paltry amount of refinance and so, they inflate the interest rates on such deals.
Type of refinance you choose – You’ll have to pay the same interest on the loans as any other homebuyer, if you opt for a rate and term refinance. Moreover, your interest rate will be 0.25% higher, if you apply for a cash-out refinance loan and your loan-to-value ratio is somewhere around 70% in terms of first mortgage. However, your mortgage payment amount will not be as high, if your loan-to-value ratio is 60% or lower.
Type of your house – Another major factor you need to consider while analyzing the mortgage refinance rate you would probably have is the type of residence you quoted as collateral for the existing loan. According to some mortgage experts, if you own a condo and you want to refinance it, then be prepared for a reasonably high rate of interest. This is because lenders perceive such properties as greater risk to their investments than single family homes.
Your credit score – Due to the housing bust, lenders have become wary of refinancing mortgage loans at the drop of a hat. Nowadays mortgage lenders will study your creditworthiness by going though your credit report. For that reason, you must have a credit score of about 650-700 so as to qualify for decent refinance rates. However, even with that type of credit rating, you’ll have to pay 3/8 times more for a refinance than people with a credit score of 760 or higher.
Lastly, do survey the mortgage market for better rates and get multiple quotes so that you can opt for the most affordable one.