This Free Refinance Advisor has been designed to help narrow down options based on your individual needs. It’s quick, it’s easy, and the more questions you answer – the more accurate your results.
Those who hold a current mortgage may have an interest rate that was great at the time they got the loan, but is considerably higher than current mortgage rates. Or, perhaps they believe they’ve improved their credit or their equity position to the point where they may qualify for a mortgage with better terms. Regardless of the reasons why, refinancing replaces your current mortgage with a new one, preferably with a better interest rate. But what factors determine your eligibility for a home refinance mortgage? Here are the most important.
What Impacts My Refinance Loan Interest Rate?
When you apply for a loan, lenders take a look at your credit report to assess how likely you are to pay back the loan. Your merged credit report is comprised of reports from three bureaus: Equifax, Experian, and TransUnion, with a score from each bureau. Most mortgage lenders use the middle of the three scores, regardless of which agency it comes from. These scores determine not only what kind of loans you are eligible for, but what kind of interest rate you’ll get.
Higher scores mean a lower interest rate. You can get a higher score by paying your monthly bills on time and paying off any outstanding revolving debt. Though refinance loans can vary from lender to lender, you’ll want your score to be above 760 to get the best options, but you can still get a favorable result with a credit score above a 620.
Your Debt vs. Your Income
One of the reasons lenders look at your credit report is to gauge how you are with paying debt. Loans carry a certain amount of risk for lenders, and if a borrower has a spotty history with making timely or complete payments, they’ll the risk through the terms of the loan. One of the ways they do this is by raising the interest rate.
In this same vein is something called your debt-to-income ratio. DTI compares your monthly debt payments (like credit cards, mortgage, etc.) to your total monthly income. Dividing your monthly income by your monthly debts will give you a DTI percentage. Lenders look at this to determine how much spare income you have every month before taking on a new loan. An acceptable DTI ratio will be in the mid-40s or lower.
Loan Value vs. Home Value (equity in your home)
Another magic number lenders look at is called the loan-to-value ratio. LTV is the total percentage of what you still owe on your loan compared against your home’s current value. For example, if you currently owe $280,000 on your home, and your home is worth $400,000, your LTV ratio is 70%. That also means you have 30% equity in your home. If you’re looking to refinance your home mortgage, an LTV ratio lower than 80% gets you the most favorable terms, including interest rates, and enable you to avoid mortgage insurance.