by Christina Pomoni

Created on: December 11, 2009

With interest rates at historic lows, refinancing is an increasingly attractive option for many homeowners who could save a substantial amount of money on their mortgage interest repayments. Besides, refinancing enables homeowners to spread their mortgage over another 15 to 30 years depending on the terms agreed. In any case, they can benefit from lower interest rates to have lower monthly mortgage payments.

Due to the credit crisis, requirements for refinancing are quite tight, particularly after Freddie Mac and Fannie Mae have changed the percentage of home value that can be financed. This has put the savings from refinancing to a lower rate out of the grasp of millions of Americans. Yet, the banking industry, enabled also by the President Obama’s $75 billion ‘Homeowner Affordability and Stability Plan’, has made refinancing possible based on certain requirements that need to be met.

Here are the factors that you need to consider to determine if they you are qualified for refinancing:

A) General Requirements

1. Debt-to-Income Ratio (DTI)

Before approving an application for refinancing, lenders calculate your debt-to-income (DTI) ratio. In simple terms, they weigh household debt against household income to see if the money your household spends is more than the money your household earns. In general, lenders ask information about your income, debt and housing costs. A high DTI ratio may delay the process of refinancing so it makes more sense to payoff some of your debt before applying. Normally, an accepted DTI ratio is maximum 38 percent, but it depends on the lender and the flexibility of the programs offered.

2. Loan-to-Value Ratio (LTV)

The loan-to-value ratio calculates the amount you want to borrow for refinancing as a percentage of the total current value of the house. In simple terms, lenders weigh the amount you want to borrow against the value of your house. Under the current conditions, mortgage refinancing is allowed where the loan-to-value ratio does not exceed 80% with a form of credit insurance. For instance, if your home is worth $280,000 and you want to refinance for $220,000, the loan-to value ratio is 79%, which is accepted. Yet, a major consideration is the credit insurance required. In some parts of the U.S. it is difficult to obtain because they are viewed as declining markets by insurers with the risk of further deterioration in values.

President Obama’s ‘Homeowner Affordability and Stability Plan’

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