Are you considering refinancing your mortgage? There are several benefits to doing so! You can get a lower interest rate (APR) and a lower monthly mortgage payment. You also receive equity, which you can use to pay for other things.

There's a lot to know before you refinance your mortgage! You won't want to jump in without some background first. We've put together this article to help you get started, so keep reading.

1. Understand the Cost of Refinancing

Before you refinance, you'll need to know how much it will cost you- you don't want any surprises! You can expect refinancing to cost between 3% and 6% of your loan's principal.

These costs can take years to make up, so you'll only want to do it if you will continue living in your current home during that time. You won't want to refinance if you expect to move somewhat soon.

However, there are many strategies for you to reduce that cost. With enough equity, you can move a lot of the cost into your new mortgage. It's also good to compare mortgage rates and terms before officially refinancing. 

You might have a strained budget if you jump in without understanding all of the costs. You won't want to cause yourself unnecessary stress by signing up for something you can't afford! Instead, take time to research the costs of refinancing with multiple lenders.

2. Know Your Current Credit Score

Additionally, you'll want to know your credit score! Your credit score and history can significantly impact the refinancing options available to you. Most VA refinancing lenders want to see a score of 620 or higher for the lowest possible mortgage rates.

However, borrowers with lower scores can still qualify for loans, but they may have to pay higher interest rates. You won't want to refinance unless you can get a new loan with an APR of at least 2% less than your current one.

Luckily, there are ways for you to get a free credit score online! If you've never reviewed your credit score before, it won't hurt to set aside a few minutes to take a look right now.

According to federal law, you're entitled to a free copy of your credit report each year from all three credit reporting agencies. These include:

  • TransUnion
  • Equifax
  • Experian

Different sites give you access to other agency reports. For example, Credit Karma lets you receive a score from Equifax and TransUnion. Experian can also give you a credit report directly through their website.

If you find that you don't have a good score, you'll want to start taking steps to improve it as soon as you can. That way, you can get better rates from your mortgage refinance.

3. Know the Equity of Your Home

Next, you must know your home's equity before you try refinancing your mortgage. The more equity that you have, the smoother your refinancing will be. You'll only hurt your finances if you start the process with negative equity!

According to TransUnion, you should have at least 20% equity before refinancing. You'll have an easier time qualifying for a new, improved mortgage. That way, you can pay it off sooner! 

Plus, with higher equity, you can receive more money from refinancing. You can quickly determine your equity by taking your current mortgage balance and dividing it by your home's market value.

As an example, your current mortgage balance is $50,000, and the market value of your home is $150,000. In that case, you'd have equity of 33.33%, which is decent for refinancing your mortgage. 

Overall, you'll want to know the amount of equity you've built up in your home. If you don't have much there, you can make slightly higher mortgage payments to build it up.

4. Calculate Your DTI Ratio

Before refinancing, many lenders will want to know your debt-to-income (DTI) ratio. Most will want to keep the new housing loan under 28% of your gross monthly income. 

It's fairly simple to determine your DTI ratio. Add up all your monthly bills first, including your student and car loans. Plus, credit cards minimum payments, housing payments, and other debts.

Once you have the total, you divide it by your gross monthly income (before you pay taxes). This final number is your DTI, which will be a percentage. The lower it is, the better odds you have of getting the best possible refinancing rates.

Let's do an example together! Say you have the following monthly expenses: 

  • Mortgage of $1,000
  • Student loans of $500
  • Car loans of $500

This amount is a total of $2,000 worth of debts. With a monthly gross income of $6,000, your DTI ratio would be 33%. While this DTI isn't ideal for mortgage refinancing, it's very close and wouldn't take long to reach under 30%.

In short, you'll need to know your DTI to see if you have a good chance of getting a new loan. Most lenders want to see DTI ratios of 28% or lower. However, lowering your DTI as much as you can before applying will help you significantly.

5. Find Out Your Quotes

Finally, you'll need to check that you receive the best possible refinancing rate. Getting multiple quotes allows you to compare all of your options. If you don't investigate your quotes, you might not get good loan options.

You'll want to check local and online banks first- you'll be surprised at what options you have! Always keep an eye out for interest rates lower than your current one. You should never take out a new loan with a higher rate!

As a general rule, consider quotes at least 2% lower than your current rate. Although, even a .5% drop can make a huge difference in how much you have to pay over time.

Know You Can Ask Questions

You must know that you can ask questions. You can talk with lenders and determine what rates they offer, if they'll accept your DTI and credit score, and how much you qualify for. This information is vital to have, so don't hesitate to ask!