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5 Things to Consider Before Refinancing Your Home


  1.  Your Equity: One of the first things to evaluate before you refinance your home is your property’s current equity. The more equity you have in your home, the better your chances of being approved. Depending on the current housing market and your financial situation, you might owe more on your home than it’s currently worth, or you simply might not have any equity in your home. While having anywhere from 10 to 15 percent equity makes for a favorable chance for refinancing, there are some government programs available to those who need some assistance getting refinanced. 
  1. Your Debt to Income Ratio: While the iron might be hot to strike on getting your home refinanced, your current debt-to-income ratio might cool down your prospects. You’ll want to keep your monthly mortgage payments to no more than 30 percent of your monthly income and your debt-to-income ratio to no more than 35 percent. Even if you’re approved for refinancing, it’s best that you always try to keep your debts to a minimum, no matter if you’re seeking approval to be refinanced. 
  1. Your Credit Score: You may have good credit and still have your refinance request denied. The reason for this is lenders have become even stricter when it comes to their lending criteria. For the absolute lowest mortgage interest rates, you’ll need to aim for having a credit score of at least 720, which may or may not be feasible for you. While it’s entirely possible to be approved for a new loan if your score is lower than 720, your interest rates likely won’t be the best as a result 
  1. The Cost of Refinancing: Nothing good comes for free, and that’s true when it comes to refinancing. Before you start searching for lenders who are likely to approve you for financing, check your financial resources to make sure you can afford the fees attached to your second home loan. You’ll likely pay between three and five percent in fees on the overall lending amount. That being said, there are ways you can absorb those fees, such as adding them to your new mortgage, which will also increase the principle you’ll have to pay. Be aware that there are some fees that can either be reduced or taken care of by the lender. 
  1. The Taxes: If you’re a consumer who relies on his or her home loan interest deduction to lower your federal income tax bill, realize there’s a chance your next tax deduction could be lowered if you refinance your property and pay less in interest. Then again, this might be one of the reasons you’re considering refinancing in the first place. Something else to bear in mind is the fact that your interest deduction will change over the initial life of your new loan once the interest percentage of your monthly payment is higher than your principle. In any case, it’s best that you reach out to a licensed and experienced tax advisor who’s familiar with the mortgage industry to provide you with up-to-date and reliable information.
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