When Should I Refinance My Mortgage?

It’s important to keep abreast of the current prime rate in order to decide if it’s time to refinance your mortgage. If you’re wondering “should I refinance my mortgage”, perhaps it’s time to check into your options and make a decision. What are your options and how can one decide if it’s time to refinance? Many people assume that because interest rates are low, it’s a good time to refinance. That may be the case if you have all your ducks in a row, but your credit may not be as good as you think.

Refinancing a mortgage means signing an entirely new mortgage loan; sometimes with a new lender. Even your current lender will pull a current credit report and review your finances all over again. Interest rates are decided on more than just your history with a lender, they have a lot of factors.

The most important factor lenders consider is your credit score; called the FICO score. The FICO score is derived from a number of factors and ranges from 350-950, with 500 being the lowest score for any type of loan and 720 being a very good score. Firstly it factors about 35% from your previous credit history. This means any late or nonpayment, judgments, collections or repossessions will all factor about 35% of your score. Another 30% of the score is your current outstanding credit. The last 35% is a mixed bag of how long you’ve had credit, what type of credit you have and if you have any outstanding credit applications. If you’re planning to refinance your mortgage, knowing how to push your credit score as high as possible is crucial.

Lenders may use the FICO score is a main deciding factor in your interest rate and loan amount, but they also consider the length of time at your job and home as well as your debt to income ratio. The debt to income ratio is a fairly big factor and is your monthly recurring debt (excluding things like phone, electricity etc) divided by your monthly gross income. Ideally if this amount is above 28% your interest rates may not be the best; above 36% and you’ll most likely be offered a poor interest rate.

When deciding to refinance your home, pull your credit report first. The free credit reports do not include a FICO score, so it’s best to order the one that does. They usually cost around $35. Once you know your credit score, calculate your debt to income ratio. If you’ve lived in your home, and been at your job, for more than a year refinancing is a good option. However, those are fairly small factors, and only come into consideration if the other major requirements fit.

You can find online amortization calculators. Most lenders will post their current interest rates for credit scores. This means if you find out you have a credit score of 650, visit the lender’s website and cross reference that credit score with the offered interest. You can then use this base to calculate if you will save money refinancing. Remember also that many banks may want your business, so even if they post a certain interest rate, call them and inquire if they would be willing to lower their rate for your business.

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