New Year’s Resolutions are notorious for being kept … for about 6 days. But there are several resolutions worth keeping this new year. One of them really should be to refinance your existing mortgage in order to benefit from the lowest rates in decades.
If you haven’t taken advantage of the current historically low mortgage interest rates, now really is the time! There isn’t much downside risk in the long term bond market (that’s the market that generally determines mortgage interest rates, not the “prime” rate market) but there is plenty of upside risk. What that means is that rates can only go so low, and we’re just about there.
Since your mortgage is a key factor in your quest for financial freedom, it’s critical to have the right kind of mortgage – a 15- or 30-year fixed mortgage with payments you can afford. The right mortgage will make getting to financial freedom land will be much easier.
Important factors when refinancing your home
Lending standards are much tighter than they were in years past, but if you can meet the requirements, most banks will be happy to refinance your mortgage. The three basic criteria are:
Your credit score.
You’ll generally need a credit score of at least 620 to even be considered for a loan — and at least 740 to get the premium interest rates. Borrowers can now get a free credit score from GoFreeCredit.com to help you determine whether you get the loan and what interest rate you want.
Your debt-to-income ratio, or DTI.
Mortgage lenders want your DTI to be less than 38%. That is, your monthly mortgage payments shouldn’t total more than 38% of your monthly income. Just divide your total monthly debt payments by your monthly gross pay.
Your loan-to-value ratio, or LTV.
Most lenders want it to be less than 80%—meaning the total amount you owe on your house should be no more than 80% of what the house is worth. For example, if your house is worth $250,000, they may not be willing to refinance a mortgage of more than $200,000 unless your credit is pristine and you have mortgage insurance.
Why a 30 year fixed mortgage is best
There are no surprises with a 30-year fixed mortgage and I love mine. I know exactly what my payments are going to be for the life of the mortgage and I pay down my principal with every payment, building equity every single month. The only variables are my property taxes and my homeowners insurance (both of which just went up).
If you plan to be in your home more than five years and you have something other than a 15 or 30 year fixed mortgage — such as one of those adjustable-rate deals that have gotten so many people in trouble — then you should refinance NOW. Rates are at historic lows as but this won’t last forever.
The best place to start mortgage shopping is online. First, go to a website like or Mortgage Search 123. Another source for mortgage rates is Quicken Loans. Don’t be afraid to see what online mortgage lenders are offering. Before too long everything will be done online.
When you compare mortgages, you will need to take note of the annual percentage rate (APR), whether the lender is charging you “points” up front (avoid them if possible), and what the closing costs will be, including fees for appraisals, title search, title insurance, credit reports, etc.
Refinancing only makes sense if the savings from lower interest payments exceed the cost of closing your new mortgage (unless you have an adjustable rate mortgage that is about to go up or if a balloon payment is coming due). If you plan to be in your home three more years or longer, you’ll generally come out ahead as long as your new interest rate is at least one full percentage point lower than your current rate.
Should you refinance?
Dinkytown.net is a slick financial site despite the odd name. You can use (for free) their many calculators that help you make financial decisions and one of them is a Should I Refinance? calculator.
Ultimately, the decision is yours to make, but with rates at 50 year lows, it makes a lot of financial sense.