Owning a home is an exciting opportunity, but it is also an expensive investment. For this reason, many people find that they must refinance their homes. If you are thinking of refinancing your home, check out these three possible complications first, so you can better avoid them.
When you have a mortgage, you are considered the homeowner, but the bank actually owns most of your home in the beginning. You own the equity, which is the difference between the value of the home and how much you still owe. To refinance, you need equity in your home. However, many lenders won't break the 20 percent rule.
For example, if you only have 20 percent equity in your home, the lender may refuse to refinance. If you have 30 percent equity in the home, the lender may only allow you to refinance 10 percent, so there is always 20 percent equity in the home.
Lost Home Value
Ideally, when you buy a home, the value will continue to increase. Therefore, real estate is a great investment opportunity. However, there may be some instances in which your home loses value. This becomes especially problematic if you want to refinance. Instead of taking the loss themselves, the lender will put it all on you, reducing your equity in the home.
In some cases, the drop in value can't be helped because of the market. Just like any market, the housing market has ups and downs. If you try to refinance when real estate values are low, you may find that your home is no longer as valuable. Similarly, if you haven't properly maintained your home or fixed minor repairs, the value may drop.
Changes in Finances
When you first got your home loan, your financial and credit score situation may have been different. For starters, if your credit score has suddenly dropped due to late payments or missed payments, you may have a higher interest rate than you'd prefer. In some cases, you can work with the lender to give you a better interest rate, but in other cases, you may need a cosigner, or you may need to boost your credit score.
It's not just your credit score that may have changed. Changes in your debt-to-income ratio could affect your refinance. Debt-to-income ratio refers to how much debt you have (credit cards, loans, etc., but not utilities, groceries, etc.) compared to how much money you bring in.
If your debt-to-income ratio is high, it means you have a lot of debt compared to how much money you make. This causes lenders to view you as a risk. If you are struggling to refinance because of your debt-to-income ratio, talk with your lender, especially if you plan to use the equity to pay off some of the other debt.
Refinancing a home has many benefits. Some people use it to invest equity back into the home, and others use it to reduce their monthly mortgage payment or shorten the life of the loan. If you would like to know more about mortgage refinance, talk to a refinancing company in your area today.Share