More Equity Required for Mortgage Refinancing

There was a large increase in the number of consumers applying for mortgage refinancing in the last month. Rates offered on the average fixed rate mortgage were at the lowest point in decades. Some consumers are taking a chance to see if the interest rates will be lowered more in the coming months, as others are not taking a risk and applying for mortgage refinancing now. Regardless of whether you apply for mortgage refinancing under the current rates or take a gamble, make sure you take a hard look at your finances to determine if you even qualify for a new mortgage. Lenders are requiring much more of their borrowers now. One of the factors that led to the current woes in the housing market was the slack standards many banks had regarding home loans. Lenders have adopted stricter lending practices since the meltdown in the credit market. They are requiring higher down payments on new loans and higher equity for mortgage refinancing. And credit scores of applicants must be excellent to be approved. This all translates to fewer approvals for mortgage refinancing, in spite of the significant rise in number of applicants.
Deciding if mortgage refinancing with the current low rates makes sense for you can be confusing. First, determine if you owe more on your mortgage than your property is worth. Some homeowners in areas hardest hit by plummeting values are in this situation. You will not be approved for mortgage refinancing if your current mortgage is higher than the value of your home. And many banks are now requiring that you have at least 20 percent equity in your property before you can even be considered for mortgage refinancing. If you pass the home equity test, move on to calculating the cost and benefits of mortgage refinancing.
First, subtract the estimated monthly mortgage payment with the new interest rate from your current monthly payment. Add up all the fees you will incur by undergoing the mortgage refinancing. Much like you did when you obtained your original mortgage, you will incur costs for documentation work, appraisers, attorney hours and bank fees. Next, try to estimate how long you anticipate owning the property. Divide the closing costs of the mortgage refinancing by the monthly savings you would gain under the new interest rate. This will tell you how many months it will take for you to recoup the costs of the mortgage refinancing (know as break even.) If it is more than the duration you plan to own the property, then mortgage refinancing is not advisable. If your break even point is less than the time you expect to own the property, then it is wise to consider mortgage refinancing.