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SALT LAKE CITY -- With interest rates so low, a lot of homeowners may be wondering if now is a good time to refinance their home or shorten their loan. But how can they tell if it's a good idea for them?
The Fed may keep interest rates near zero until next year, but there are other factors that go into whether or not refinancing is a good idea. The first factor may seem the most obvious: Can I afford it?
A lot of people may think they can afford a slightly higher monthly payment. But lenders may determine your ability to afford the higher monthly payment that comes with shortening your loan differently than you do. Some people, when their other debts are added, don't have high enough of a percentage of their monthly income left over to convince the bank to lend them the money.
Mortgage loan specialist Lee Yates said, "If you take your mortgage payment plus other debt that you're servicing, such as your car payment, credit card, etc., add those together, they should equal 45 percent of your net growth income."
Most lenders want to see 20 percent equity in a home. If they don't have that, they're a little nervous about it.
–Lee Yates
Yates says many banks won't lend to someone who has less than 50 percent of their monthly income left to pay their debts.
"If you still have 55 percent left over, then you would be a good candidate for a loan," he said.
Yates says you also need to determine how stable your job is and if you have enough equity.
"Most lenders want to see 20 percent equity in a home. If they don't have that, they're a little nervous about it. There are ways to get around it, but then you have to start paying mortgage insurance. It makes it a little harder to justify refinancing your home when that kicks in," he said.
If you're underwater in your home, that's almost always a deal breaker. Sadly, many people who are underwater are so through no fault of their own. Home values have dropped so much, many people are stuck paying more than the home is worth.
"There are some loan programs out there that will go up to 125 percent of the value of the house, but they are pretty hard to come by," Yates said.
E-mail: pnelson@ksl.com
