Debt Ratio

• Prior to refinancing your mortgage try to pay down as much debt as possible. Lenders want you to have a debt ratio (monthly debt/monthly income) of 41 percent or lower, otherwise your application could be denied. With too much debt your new mortgage payment may be unaffordable. Make a list of your debts and pay them off starting with the smallest balance. Each monthly payment you eliminate will help you come in under the maximum debt ratio.
  
  

Credit Score

• Your credit accounts should have no late payments in the past 12 months prior to refinancing. Late payments can lower your credit score and affect the interest rate you receive. The higher the credit score the lower your interest rate. A lower rate of interest allows you to save a significant amount of finance charges over the life of the loan. Some lenders will not approve your application if your credit score is lower than 620.
  
  

Costs

• Refinancing may require you to pay some costs such as title search fees, appraisal fees, credit report, closing costs, application fees and points. You need to stay in your home long enough to recover your fees after refinancing. Subtract your new payment amount from the old payment amount and divide your costs by the difference. This will give you the amount of time needed to recoup your fees. For example, if your old payment was $1,400 and the new payment is $1,250 with costs of $4,000, it will take you close to 27 months before your fees have been recovered: $1,400 - $1,250 = $150; $4,000/$150 = 26.6.
  
  

Appraisal/Equity

• If home values are falling because of a slow economy you may lose equity, which can prevent you from refinancing. A mortgage lender will have an appraisal done by a professional. The appraiser will compare your home to comparable home values in the neighborhood to determine the proper value. A licensed appraiser will be able to access the value of your home by inspecting your entire property inside and out.
  
  

Title Search

• Your lender will find out if you have any encumbrances on your property, such as liens, mortgages, or mechanic liens. Any liens could reduce the amount of your equity and keep you from refinancing your mortgage. A title search will determine if you have a clear title.
  
  

Interest Rate

• When you can receive an interest rate of 2 percent less than your current rate, refinancing is a good idea because of the substantial savings in finance charges as well as a lower payment. If you have a variable rate, you may want to refinance and receive a fixed rate, which provides you with a fixed payment.