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Refinance – Keep in mind the essential dos and don’ts

Posted by Catherine on December 24, 2012 at 3:05 AM

It’s evident that the lowest mortgage rates that you’re experiencing now, has actually triggered off an avalanche of new mortgages. In fact, the Mortgage Banker’s Association is expecting to see about 3 trillion dollars in business this year. However, it’s literally the new buyers who seem to be interested in applying for the home loans. Statistics show that 80 percent of the recent home loans actually went to the current homeowners going in for refinance. The Association is of the opinion that the average buyer of a 30 years fixed mortgage who makes a 20 percent down payment actually pays 4.63 percent now. However, it has been seen observed most aren’t qualifying for these great rates.

The dos and don’ts of refinancing

If you’re looking forward to refinancing your mortgage, then here are some dos and don’ts that you should keep in mind so that you qualify for these great rates.

1. Do enhance your credit

The very first thing that you should do is enhance your credit score so that you can take the benefit of the great rates. This might actually prove hard if you’re planning a refinance because you’ve got a tight budget. Begin by getting hold of a copy of your credit score. Now, if your credit score isn’t too high, then you should consider working on it for a few months by paying off your debt and removing errors. You should then consider applying for refinance. Of all the factors that a bank generally considers when applying for a loan, this one happens to be the one that you can easily get rid of.

2. Don’t make the mistake of overextending

It’s important that you don’t make the mistake of overextending yourself. Remember, lenders these days are coming back to the traditional way of thinking about the debt to income ratios. Hence, it’s important that you think the same too. A few decades ago the front end debt to income ratio was 25 percent. Now, banks are likely to consider your back end debt to income ratio as well. This includes all your monthly loan payments, say for instance your credit card or student loan payments and likewise. Basically the problem begins when the lenders start allowing the debt to income ratio to climb up to 30 percent and higher.

3. Do pay your points

It’s always advisable that you pay your points or closing costs on time, and especially if you have plans of staying on the loan for a long period of time. When you had got your mortgage, you probably chose not to pay your points, however you should pay them if you’re looking forward to getting the best rates. Don’t be misled by seeing the statistics of a loan without any points. Remember, paying the higher costs up front can actually reduce your monthly payments to a great extent.

4. Don’t consider same payment over a longer mortgage

Never make the mistake of considering the same payment for a longer mortgage period. Rather it’s always advisable that you try and swing your current payment, in lieu of simply going in for a refinance to decrease your monthly bills. You could change over to a 15 years mortgage. As for the fact if you sell your house in between, you’ll have built up on your equity to a great extent by then.

You should keep in mind the 4 dos and don’ts in mind whenever you go in for refinance. For otherwise, there are chances that you just might not qualify for the great rates available.


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