Mortgage refinancing involves replacing your ongoing home loan with a new one. Refinancing allows you to borrow on your home’s equity, pay off your mortgage, lower your monthly payments, or reduce the loan term. That said, you must first determine whether if you’re eligible and prepared for the process. This article lists some of the things you should know before you consider refinancing your mortgage.

Determine the purpose
When you decide to refinance your mortgage, there should be a clear goal in your head. You must know whether you’re doing it to lower the loan term, reduce your monthly payouts, repay the debt, or extract some equity to pay for home repairs.
Every situation is unique, so you must understand your expectations before you consider mortgage refinancing. Will it be favorable if the new loan terms reduce your monthly payments but extend the loan term to 30 years.

Be aware of your credit score
It always helps to keep track of your exact FICO credit score before you decide to refinance your mortgage. Your credit score directly influences the interest you will pay on your borrowings and the kind of loans you qualify for. Merely looking at your credit reports can help the bank know your credit score.
Not many know this, but your credit score with the three credit reporting bureaus—Equifax, TransUnion, and Experian—may vary. This is because the lending agencies from where you get your credit cards or loans do not necessarily report to all three bureaus, and the agencies use varied scoring models. So, it is recommended to check your credit reports from all three credit reporting bureaus before applying for mortgage refinance. Also, consider improving your score before filing your application to secure a fresh mortgage at better terms.

Know your home’s equity
This is one of the primary qualifications for refinancing a mortgage. Home equity is the percentage of its value that you actually own, which would translate to the amount you would be left with if you sold the house and cleared your mortgage. The more equity you have, the better when considering mortgage refinancing. If you have little or no equity, refinancing your mortgage can be an issue, especially with conventional lenders. You must have at least 20 percent home equity to qualify for refinancing. You may qualify if you have under 20 percent equity and have a good credit score, but the lender may charge higher interest.

Calculate your debt-to-income ratio
Many think that it will be easier for them to refinance because they have an existing mortgage loan, but that’s far from the truth, as lenders also examine the debt-to-income ratio. Although certain factors like long job history, income, and savings, will help you get a loan, lenders expect you to keep your mortgage payments below 28 percent of your total monthly income and prefer a debt-to-income ratio of less than 36 percent. While this number can be relaxed to 43 percent, the lower your debt-to-income ratio, the higher are the chances of your credit application being approved.

Consider the closing costs
Keep in mind that you must bear the closing costs before refinancing. These are the expenses you have to pay to borrow for your home purchase or refinancing. These costs include a lot of the same fees you paid when you took the initial mortgage, and the cost usually depends on your location and lender. That said, typical components that make up the closing costs are inspection fee, application fee, appraisal fee, title search, and attorney fee. These costs can come up to around 2-6 percent of the loan amount.