Requirements and Expectations

Ideally, your home’s value holds steady or increases as you pay off your mortgage. There are no guarantees this will happen, however. Market forces beyond your control may lead to a general drop in housing prices or a reduction of home values in your neighborhood or region. Unless you have sufficient equity in your home, you won’t be approved for a refinance loan. (Equity is the percentage of your property you actually “own” based on its total value and how much you’ve paid on the principal already.) Before you shop mortgage lenders, do the math for yourself. If you can’t claim at least 20% equity in your home, it will be difficult refinance.

Your debt-to-income ratio matters as well. Essentially, this is the total amount you owe to all parties divided by your income over a period of time. If your income has gone down or your debt has gone up since your initial mortgage, you may find it difficult to get a refinance loan – at least on terms which would make it worthwhile.

Also considered are your employment history, your monthly income, and any investments or savings to which you’d have access if for some reason it became difficult to make your house payments. Many lenders won’t approve a home loan – refinanced or otherwise – which would result in a monthly payment above 38% of your gross income.

Finally, of course, there’s your credit score. If your primary reason for refinancing is to lock in lower interest rates, you may find that lenders expect a fairly high score in order to do so. While borrowers with a score of 620 or better can often secure mortgage refinancing, the best rates are typically reserved for those with scores of 750 or higher. That doesn’t mean you should give up if rejected by the first lender to which you apply, or if you’re not offered the terms you believe you deserve. There are too many options in the 21st century not to explore at least three or four before determining your best course of action.

Defining Features

The world of mortgages and refinancing has its own unique terminology. Here are a few of the terms you’ll want to know before you begin – although you should absolutely feel free to ask as many questions of potential lenders as you need in order to feel comfortable.

“Adjustable Rate Mortgage” (ARM) – Interest is the cost of borrowing money. With an “adjustable-rate mortgage,” the interest rate you pay may change based on overall market rates. The most typical mortgages lock in the initial rate for five years, then re-evaluate based on markets once per year after that.

“Break-Even Point” – The primary goal of any no cash out refinance is to save money, but refinancing costs money up front through closing costs and other fees. You “break even” when your monthly savings finally add up to enough to cover the initial costs of refinancing. This may be a few years or longer, but you should know your “break-even point” precisely before signing off on the new loan.

“Equity” – the amount of the value of your home to which you may legally lay claim based on payments you’ve made towards the principle of the loan.

“Fixed Rate Mortgage” – Interest is the cost of borrowing money. With a “fixed-rate mortgage,” it remains the same throughout the loan, so that monthly payments remain predictable and you know exactly when your final payment will be do.

“Foreclosure” – If you are unable or unwilling to make your mortgage payments, the lender has the right to take your home and sell it in an effort to recoup their losses. It’s a tedious process, and most lenders would much rather work out payment arrangements with you, but they will follow through if necessary in order to maintain credibility with future borrowers.

“Points” – These are prepaid finance charges which then allow a lower interest rate on the rest of the loan.

“Private Mortgage Insurance” (PMI) – If the lender is concerned you may be unable to make your payments at some point, especially if the value of your property is likely to drop below the balance on your loan along the way, they may require you to pay for private mortgage insurance. While it may sometimes be rolled into the loan so that you don’t have to pay for it all up front, doing so adds to the amount on which you’re paying interest.