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Rules for Refinancing a House

Introduction

By refinancing your existing mortgage loan, you could save a significant amount of money in monthly payments. Simply by reducing your loan’s current interest rate by one point, you could save more than $150 a month, depending on the size of your loan and its current interest rate. But refinancing a home loan comes with several rules. How well you meet these rules will determine whether your lender approves your refinance request.

Equity

The majority of conventional mortgage lenders will require you to have at least 20 percent equity in your home before they will approve you for a refinance. To know your equity, lenders will send a home appraiser to your residence to determine its current market value. Your lender compares this figure to what you still owe on your home loan to determine your equity. If your home has dropped in value since you purchased it, you might not have the equity required to refinance.

Credit Score

Lenders will also check your credit before approving a refinance. This is important because lenders rely on your three-digit credit score to determine your loan repayment risk. If your credit score is low, under 700, your lender will charge a higher interest rate. If this rate is too high, refinancing your home loan won’t save you enough money to cover the loan-origination fees your lender will charge. You’ll have to determine if the new rate makes refinancing financially worthwhile.

Monthly Debt

Lenders will ask for copies of your most recent credit card statements, savings and checking account statements, investment statements, most recent paystubs and current federal income tax return. This is to determine how much income you generate compared with how much debt you’re responsible for paying off each month. Most lenders will require your monthly debts, including your new mortgage payments, to be no more than 36 percent of your gross monthly income. Those with higher debt-to-income ratios might not qualify for a traditional mortgage refinance.

Employment

Lenders want to work with homeowners with a steady source of income. This increases the likelihood that borrowers will make their payments on time. Because of this, most conventional lenders will ask for a signed statement from your employer telling how long you’ve worked at your current job and the size of your annual salary. Lenders prefer to work with borrowers who have worked at their current jobs for at least three years, though most will be flexible on this requirement.

Key Concepts

Mortgage refinancing rules

Home refinance requirements

Refinancing home basics

References

Bankrate, Inc.: Mortgage Basics

http://www.bankrate.com/finance/mortgages/refinancing.aspx

The Federal Reserve Board: A Consumer’s Guide to Mortgage Refinancing

http://www.federalreserve.gov/pubs/refinancings/default.htm