3 Challenges to Refinancing

Buying a home tends to be a common dream for many people, but in this day and age many folks are dreaming of refinancing their current home rather than putting money on a new one. Of course, there are some great reasons to refinance: to lower your interest rate (and therefore your mortgage payment), to switch from an adjustable-rate mortgage to a fixed-rate mortgage, to consolidate two mortgages, or cash out, just to name a few.

However, there can definitely be some challenges to refinancing, and they definitely need to be examined before you rush in head first. So here are a few potential difficulties you might run into if you’re considering refinancing.

1.) Unpaid debt. In general, lenders want to see you paying less than 38% of your income to your overall debt. That means unpaid student loans, car loans and credit card debt may all hurt your chances of successfully refinancing your home loan. If you’re paying out a higher percentage of your income to current debts, it can be difficult to refinance at all, and even if you do, it’s not guaranteeing you a better rate on your mortgage.

2.) No equity. Equity is essentially the percentage of your home that can’t be leveraged by a mortgage. If you have no equity in your home, lenders are going to be reluctant to refinance your mortgage. The reasoning basically breaks down to your LTV, or your loan-to-value ratio of your home. To refinance, you need to have at least more than 10% equity in your home (or an LTV of less than 90%).

3.) A lack of cash. Think of a need for cash at refinancing in the same way you think of cash when buying a home. You’re going to need a little extra for emergencies (repairs, or issues found during inspection, for example), for closing costs, or as a kind of “down payment.” Just as buying a home requires a certain amount of cash for these things, so does refinancing. Unless you have a bit of cash in savings, refinancing may be a very difficult obstacle to overcome.

Of course, if you do happen to run into any of these issues, don’t consider yourself at a complete loss. An experienced real estate agent will be able to help you figure out how to best approach the idea of refinancing. Even waiting an extra year could help with many of the issues listed above.

Have you ever refinanced? What kind of obstacles did you run into?

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