Considering a Home Refinance? Three Things to Know Before You Apply

Applying to refinance a home mortgage is on the minds of many Americans as they watch home mortgage interest rates slowly tick upward. Home loan interest rates, as well as those used for auto loans, and some other types of credit, are tied to the bank prime rate. According to industry experts, this rate is expected to continue to rise, reaching 6.25 percent by the year 2020.

Homeowners who have been on the fence about refinancing to pull some equity from their home must now move forward to refinance or risk having to pay a much higher thirty-year fixed rate than they are currently paying. If you are trying to make a final decision about whether refinancing is a good move for your family, the following information can help. 

Decide if the amount of equity involved is enough

The amount of equity you have in your home determines whether or not you will be required to pay expensive private mortgage insurance (PMI). Before making a decision to move forward and refinance your current mortgage, do the math to ensure that you will be able to cash out the amount of equity you need while still retaining at least 20 percent of equity to prevent paying PMI. 

Decide how long you plan to remain in the home

Another important factor to consider before opting to refinance is the cost of doing so. Most lenders estimate total refinance costs to be approximately 3 to 6 percent of the mortgage amount. Additionally, there may be prepayment penalties and additional costs that must also be factored in. 

Since recouping these costs can take years, homeowners who are planning to move within the next few years may not be able to do so without taking a loss. 

Decide if you can afford to refinance

Credit scores and debt-to-income (DTI) figures can also help homeowners decide whether to pull cash from their home by refinancing it or whether waiting is best. Credit scores that have taken a hit from late payments or a DTI ratio that is too high can keep you from obtaining the best interest rate and refinancing terms.

Additionally, changes in employment and reductions in overall household income can also be problematic when refinancing a home loan. 

Your real estate broker or a qualified home refinancing service can help you determine whether your current situation can benefit by refinancing your home now or whether continuing to wait is best.