From time to time, mortgage rates drop and reach record lows. The COVID-19 pandemic is an example of an event that resulted in a significant drop in interest rates.
However, COVID-19 also made it more difficult for self-employed borrowers due to uncertainty in economic conditions.
If you’re considering refinancing your mortgage, now is a great time as mortgage rates are near historic lows.
Before you rush into it here are 7 things you need to know before you refinance your mortgage.
Knowing the requirements before you apply can help you learn whether you qualify for a refinance loan or not.
Here are the top seven requirements to understand before you apply.
1. Have a Valid Reason or Tangible Benefit.
Many of our customers find a benefit to refinancing. This includes a lower mortgage payment, taking cash out, reducing the interest payments on the loan or paying of the house early.
To Obtain a Lower Interest Rate
What is the interest rate on your mortgage? If it is higher than the current rates available, refinancing is the only way to take advantage of the lower rates.
When you refinance, you get a new loan with a new interest rate. A lower rate will result in having lower mortgage payments and will help you pay less money in interest.
If you want lower mortgage payments and can get a lower interest rate through refinancing, then you should consider going through with it.
Always work with a mortgage professional. There are many factors to rate such as credit, loan to value, and lender credits vs discount points. Finding the right solution to meet your specific goals is why mortgage brokers like Choice Home Mortgage exist.
To Switch to a Fixed-Rate Mortgage
The second reason people consider refinancing is to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan. ARMS are unpredictable, and that is the one feature people dislike about them.
With a fixed rate, you will never have to worry about your rate increasing. You will have a steady mortgage payment amount for the life of your loan.
To Take Cash Out
Refinancing as a way to take cash out of your home is also a valid reason.
You can do this if you have equity in your home.
Taking cash out can be used to pay off high-interest debts, start a business, remodel the house, or for investment purposes.
To Eliminate Private Mortgage Insurance
You can also eliminate private mortgage insurance (PMI) by refinancing if you have enough equity in your home.
If you’re tired of paying PMI and feel that your house is now worth enough, refinancing is the ideal way to stop your PMI requirement.
In most cases, you will need to bring the loan to a value below 80% to remove PMI.
2. Meet the Financial and Credit Requirements
When refinancing, you must also meet financial and credit requirements
To do this, you must prove you can repay the loan.
You must also prove that you are creditworthy enough for the lender to approve your loan application.
Here are some details to know about each category:
Financial Requirements
One part of the application process is providing application documents such as W2, Paystubs, Tax Returns, Award Letters and other proof of income.
Lenders also calculate ratios when evaluating a person’s finances. One popular ratio is the debt-to-income (DTI) ratio.
The answer to this ratio reveals how much debt you must pay compared to the income you earn. If your DTI is too high, you will not qualify for a mortgage loan.
It is also important to show two years of consistent income. Most lenders will average your income over two years when calculating DTI.
Self-employed borrowers, you will also need to have both your personal tax returns and business tax returns if you own more then 25% of a business. We also recommend to have your accountant prepare a year-to-date (YTD) profit and loss statement (P&L).