A Brief Introduction to Refinancing
A home loan is a loan taken out to buy a house which is taken out for a period of 15 to 30 years term and this loan will be based on the principal value, monthly payment and interest rate. When applying for home loan most lenders may want to review how you have handled your credit in the past. This includes different types of credit accounts like utility bills; revolving debt like credit cards, your installment debt like car loans, student loans, etc. are paid consistently. Again a consistent source of income can make a lot of difference. It is very important to have a good debt to income ratio in order to qualify as it reflects your regularity in paying off your bills and also creates a positive impact on your lender.
But if you already have a home loan you can gain the benefits of home loan refi such as low interest rate, better terms of repayment or can get cash out from the equity built up in your home. As you consider refi option, evaluate to see if it is profitable and what you will need to consider in order to refinance your home mortgage. Firstly, determining if this is the house you intend to stay for a long term will make refinance a better choice because if you put the house for sale in next 5 years the closing cost would not be worth the refi. Next you need to consider the equity that you have and also the current market value of the house. If the value of the house happens to be lower than your actual mortgage, refinancing won’t make sense as negative amortization won’t allow refi to occur. Finally, you must also consider the fees as home mortgage refinancing requires application fees, appraisal fees and loan origination fees. Lastly your credit score also plays a role in determining the likelihood of refi.
In these times of economic uncertainty and any forthcoming financial crisis, you can cash out on your home which serves as collateral that is called home equity line of credit (HELOC). A HELOC in many ways is similar to your credit card where the lenders usually determines the credit limit on the home equity line by taking a percentage of appraised value and then deducting from that appraised value the amount owed on the existing mortgage.
In determining your actual credit limit, the lender will also consider your ability to repay the loan by looking at your income, debts, and other financial obligations as well as your credit history. These funds can be borrowed as and when you need with the requirement of paying back the amount you utilized along with the interest. You will have a minimum monthly payment requirement and beyond the minimum, it is up to you how much to pay and when to pay.
It all boils down to the fact of knowing what you will be paying towards your future would-be monthly payments using a home loan calculator or a refinance calculator. A good rule of thumb is that your monthly housing expense should not exceed 30% of your monthly income. Any more than that and you could be setting yourself up to fail financially. Depending upon other factors such as the amount of other debt payments like credit card debt should be taken into consideration.
For more assistance to evaluate such critical decisions better, consult an expert panel who could help you to understand your options better.
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