Mortgage Calculator Refinance

You might think that refinancing an existing mortgage would be simple, especially if you have been faithfully making those mortgage payments month after month despite a job layoff or some of financial concern.  But wait!  Qualifying for a new loan (and yes, a refinance is a brand new loan!), isn’t easy these days for those with perfect credit.  Add in a few missed (or late) credit card payments; too much debt or even a loss in equity in your home and you may no longer qualify for a new mortgage on your own house.

What do you need to know when considering refinancing your current mortgage to a lower rate in order to save some money every month? Here are some of the basics:

• Your Debt Ratio: When a lender looks at your current financial status, they look at more than whether you have been making your payments: they also take a detailed look at how much other debt you have accrued and your ability to pay off that debt should you lose your job, get sick or find yourself dealing with some other sort of emergency.  If your debt ratio is too high, than you may find yourself unable to secure a new loan.
• Your Home’s Value:  A lot of homeowners are now finding themselves “under water” (or close to it). But, what does that really mean?  If your property has lost value in the last few years, you may now owe more than your home is worth at the moment.  Since most lenders are requiring at least 20% in equity these days to approve a loan, a drop in your house’s value could leave you unable to refinance into a lower rate loan.
• Your Employment Prospects: If you have been unlucky enough to live and work in an area hit hard by the recession, than your job may still be on the line.  Lenders no longer just look at your current paycheck when considering a loan approval; they are also looking at the viability of the company you work for when making these important mortgage decisions.  If your company has had a lot of layoffs recently, or may remain in financial distress, with the possibility of more ob layoffs in the future, your lender may deny your loan request.
• Your Credit Worthiness: When you apply for any type of loan (but especially a mortgage), a lender will look at five important factors to decide whether or not you are a good financial risk.
• Your Character: Your lender will likely take a closer look at your character when it comes to paying your bills on time, no matter what is going on in your life, when reviewing your loan applications.  This means they will consider whether you pay your electric bill on time; let your car payment slide around the holidays and even if you tend to wrack up a lot of unnecessary credit card charges on a whim during vacation time.  What they are really looking for here are signs that you are fiscally responsible – or not.
• Your Financial Capital: Your financial capital is basically the funds that you have in reserve.  This includes equity or savings that are available for you to use to make your mortgage payment in the event of an emergency or temporary job loss.  Right now most lender are looking for at least 6-9 months in living expenses set aside in a savings account as a rainy day fund.  
• Your Loan Capacity: When determining your capacity to pay off such a large debt over a long period of time, most lenders will take a close look at your employment history.  If you tend to jump from job to job or take on lower paying jobs for no good reason in between higher paying ones, they may not consider your application a good risk.
• Your Collateral: In order to qualify for a new mortgage, your property must be worth more than enough to pay off the loan in the event that you default and the bank must foreclose.
• Condition: Condition refers to the outside factors that could affect your ability to pay your loan. It can also refer to the lender’s ability to give away funds in the first place, which you may have little or no control over.

Refinancing one mortgage for a new one with a lower interest and/or shorter term can be a smart move that will save you thousands of dollars over the life of your loan.  But, they are not guaranteed, and for some, the chances of refinancing right now are slim.  That is why it is so important to know what a lender will expect before putting in a formal application that may be denied.