Top Questions to Ask Yourself

Here are some things you need to ask yourself before applying

1. What are my main reasons for refinancing ?

2. How much usable equity do I have in my home ?

3. How long do I intend to stay in this property ?

4. What is more important lower monthly payment, or lower costs ?

1.) What are my main reasons for refinancing ?

Some reasons include lowering your interest rate and/or monthly payment, paying off high interest credit card debt, taking out equity for home improvements, or even a down payment on an investment property.

By putting the equity in you home to work for you, it is easy to accomplish the goals you have in mind.

2.) How much usable equity do I have in my home ?

To find out the amount of usable equity in your home, you will need to find your Loan to Value ratio (or LTV). Determining your LTV is a major factor in qualifying for loans.

By dividing your new total loan amount (including any cash out, 2nds, or HELOCs) by the total market value of your home, you will come up with your loan’s LTV.

If your loan’s LTV is less than 65% you will be in the best possible tier. After 65% the tiers go up in 5% increments, (70%, 75%, and so on). Loans with higher than 80% LTV require Private Mortgage Insurance (or PMI).

That will all depend on which program you choose and how you qualify. Loans with 90% LTV or higher limit your options and you may end up with a higher interest rate than you expected.

3.) How long do I intend to stay in this property ?

If you plan to stay in this home and not refinance again until the home is paid off, a long term fixed rate might be your best option.

If you feel that you will sell, refinance, or move out of your home and turn it into a rental property within the first 5 years, you may find that paying down your principal balance can be irrelevant.

It is a commonly known fact that the amortization schedule of a 30 year loan has very little effect on the principal balance within the first five years. You can use this to your advantage by getting into a loan that offers interest only payments.

If you know that you are not going to be in the home after 5 years, it may be in your best interest to take control of your monthly cash flow.

4.) What is more important lower monthly payment, or lower costs ?

There are many different ways to refinance or take out a new loan. You may be offered a loan with “No Costs” or “No Points” or you may be offered a loan that does have costs or points. Knowing the difference can be very helpful.

When a company offers you a loan with “No Costs”, they will normally charge you a higher interest rate and you will end up with a higher monthly payment.

This would be optimal in cases were the loan will not be held for a long term; for example if you plan on selling your home or refinancing within 5 years.

When a company charges “Points”, they are “buying down the rate” to offer you an interest rate that you might not have normally qualified for. When you do a loan with costs, you normally can get a lower interest rate, and lower monthly payment.

This would be optimal for loans that you plan on keeping for a long time or until you have the home paid off.