Refinancing your mortgage could be an intelligent financial decision when done the right method. You can draw on your home’s equity, receive lower interest rates or even reduce or extend the terms of the loan. Each of these is excellent results for both you and your pocket.
It isn’t a matter of time since you bought your home or whether it’s been a few years, or years. Think about re-evaluating your home and mortgage to determine if refinancing could be beneficial to your finances.
The process is as thorough as getting a new mortgage, which is why we’ll tell you precisely when you should think about refinancing and how you can get the job done.
What is a mortgage refinance?
Refinancing mortgages is the procedure of replacing a mortgage with a new loan. The new loan could have an interest rate or term, or amount that is different from the original mortgage.
Refinancing mortgages is a popular option to benefit from reduced interest rates to alter the terms of their loan or to draw in the equity that they’ve accumulated in their house.
How does refinancing a mortgage work?
Refinancing your mortgage is a lot like applying for home loans. It’s also important to know that you don’t need to make use of your current servicer or lender. You can choose any mortgage provider you’d like to refinance with.
After searching in search of lenders and comparing loans, you’ll need to fill out an application in a formal manner. This requires you to submit your financial statements and income. The underwriter and loan officer will review your documentation to determine if you are able to pay for the new terms.
Mortgage Refinance Requirements
The lenders of mortgage refinance are primarily focused on three aspects including credit score, debt-to income ratio and the average loan-to-value ratio (LTV).
- Credit score: Lenders typically prefer applicants with high credit scores when evaluating mortgage refinance requests. A credit score that is good is usually deemed to be over 670, however this may vary based upon the lender. If you have less credit score, you might still be able refinance your mortgage. However, you could receive lower conditions, for example, an interest rate that is higher.
- Ratio of debt-to-income: Your monthly debt should not exceed 43 percent of your take-home pay, the same as a normal mortgage. Apart from personal credit card debt and loans as well as your mortgage payment from the last month in that amount.
- Ratio of loan-to-value (LTV): Lenders want to see a low loan-to value ratio (LTV). Typically, you must have at least 20 percent equity in your home. Alongside personal credit card and loans as well as your mortgage payment for the new year in that amount.
How soon can you refinance your home?
When it comes to refinancing, lenders are usually more concerned about the equity in your home than how long you’ve owned it. This is especially true in a cash-out refinance, which requires 20% equity in your home. If you just want to change your interest rate or the term of your loan, then you’ll need between 5 and 10 percent of your home’s equity.
If you’ve already refinanced your home once after the initial purchase, your lender may tell you to wait a bit before doing it again. The industry standard is usually six months, so as long as you’re over that threshold, you won’t have a problem.
Prepayment penalties
One issue to be aware of, however, is that there may be a prepayment clause in your existing home loan. While this is rare nowadays, this penalty could charge you a significant amount of money if you pay off your mortgage early.
When you refinance, that’s exactly what you’re doing: paying off your old mortgage (and lender) with a new mortgage, which is likely to be through a new lender. Check your existing loan contract to make sure that refinancing doesn’t come with any unexpected penalties.
How much will you end up paying?
Some early repayment penalty clauses are structured so that you can pay 80 percent of the interest you owe over the next six months. This can easily amount to thousands of dollars, especially if you’re still paying off a mortgage with a high interest rate.
When to Refinance a Mortgage
After you’ve discovered the top refinance lenders there, be sure that you’re refinancing only for the best reasons. Here are a few of the most popular reasons to refinance your mortgage.
Lower Your Monthly Payments
It is entirely possible to refinance your loan to lower the amount of your payments. In order to save money over the duration of the loan, you can refinance it to a lower rate in the event that mortgage rates have decreased since you took out your loan. If your credit rating has improved, you may be eligible for an interest rate that is lower for refinancing in addition.
If you’re having difficulty making the payments on time, you might also think about refinancing to an extended loan term. This spreads your existing mortgage over longer periods of time.
For instance, if paid off your mortgage for ten years with the basis of a 30-year loan You could extend the current 20 years to an additional 30 years. However you should proceed with cautiousness, based on the financial condition of your family and retirement plans.
Cash Out Your Home Equity
If you own equity in your home, at minimum 20%, you may be eligible for cash-out refinance. This lets you get a lump sum and then apply that amount to your current loan. Typically you can take out loans up to 80 percent of the equity.
Let’s look at an example.
If your home is valued at $200,000 and your mortgage is reduced to $150,000. You’ll have $50,000 of equity. The bank will allow you to take out loans up to 80 percent of that the amount, that’s $40,000.
If you are eligible for the loan, you can then refinance your mortgage for a total of $190,000. You can make use of the cash to finance home renovations as well as medical bills, college tuition and high-interest debts, or any other item.
Change the Terms
Shorter loan terms usually have lower mortgage rates because there’s a lower possibility of you committing a default with the loan. After you’ve paid off a certain amount of your current 30 year mortgage, you might be able save interest by changing to a 15-year loan.
If, for instance, you’re at 15 years in a 30 year fixed mortgage, then you have 15 years to pay. Therefore, you could save thousands of dollars by obtaining lower interest rates by using an actual fixed mortgage of 15 years.
Switch to a Fixed Rate Mortgage
If you originally taken out an adjustable rate mortgage (or ARM) and your fixed-term period is about to expire, you must think about refinancing the loan. There is a limit on the maximum amount the adjustable mortgage could be. It could be higher than the current fixed rates.
Talk to a loan provider to find the best solution to avoid a substantial increase in your monthly installment. Be sure to prepare for the future as it may take a while for approval to be completed.
When Not to Refinance
Why should you not refinance? If your credit score declined dramatically since you took out your first mortgage, you might be pleasantly surprised by higher interest rates. In the same way, refinancing today might not be a good idea when you qualify for a low-interest interest rate in the downturn.
Also, remember the fact that any mortgage refinance has closing costs, similar to the initial home loan. Therefore, it is important to ensure that any financial benefits you hope to gain from refinancing outweigh the extra closing costs.
All of these factors are discussed with a qualified lender in person, over the phone or on the internet. Make the time to ensure you’re making the right choice regarding your next refinance of your home.
How to Refinance a Mortgage
Refinancing your home doesn’t happen overnight. Actually, there are a number of steps required. Here’s a rundown of the process to help you understand what you can expect.
1. Determine the Type of Refinance You Want
We’ve discussed setting the goal for your refinance, and this is a crucial aspect of establishing the process. You might want a simple refinance, which simply changes the rate of interest. Perhaps you’d like to cash out a portion of your equity. Or, you might want to refinance an adjustable-rate mortgage to a fixed rate or change the length of your contract.
2. Check Your Credit Score
Once you’ve identified the kind of mortgage you’re looking for you can begin making preparations to apply for it. Understanding your credit score will let you know what you can anticipate regarding loan eligibility as well as interest rates.
Certain types of loans require absolute minimums whereas others have more flexibility. Review your credit score in advance so that you have an idea of whether you are in compliance with basic requirements for refinancing.
3. Estimate Your Home’s Value
The next step is to know how much your house is currently worth. The best method to do this is to examine the comparables in your area.
Look up websites like Zillow as well as Realtor.com to see the current prices for sales like and also properties that were recently sold. Check out the cost per square foot of these properties and apply that figure to the area of your own home.
Of course, it’s not an absolute. The true value of your home depends on many factors, such as improvements and the size of your lot. However, it is possible to take these aspects into account to give you a an idea of what your appraised value might be.
4. Compare Lenders
There is no need to make a change with the lender you have currently. It’s actually wise to look around to find the most favorable loan conditions. Check out all the details of the refinance offer. A low interest rate is crucial, but you’ll need to think about closing expenses as well as origination charges.
The way a lender structure the new loan is important and can affect your choice. If you’re trying to cut back on the amount of money you’ll need upfront, you might want a lender that allows you to include closing costs into the amount of the loan. Also the low interest rates might be the most important factor when selecting the right lender.
5. Get a Loan Estimate
If you compare rates and charges from a variety of mortgage companies, you will be able to request an estimate of the loan amount from the top lenders. The loan estimate is a type of form that gives you the most important details regarding the conditions of the refinance mortgage.
It’s intended to help borrowers evaluate different loan options to make an educated choice on which one is best for them. The loan estimate contains the loan’s terms, the expected monthly payments, closing costs, as well as other costs associated to the loan. It also contains details about the lender as well as the mortgage broker (if applicable) and real estate broker (if appropriate).
6. Prepare for Your Application
Once you’ve selected the lender with the rate and conditions that you are comfortable with, it’s time to begin gathering the necessary documents to submit the refinance request. You’ll likely require documents like bank statements and tax returns from the previous two years, as well as pay receipts.
Making sure that all the paperwork is in advance can help make it easier during the application and underwriting process.
7. Get Ready for the Appraisal
One of the steps in the refinancing process for mortgages is to obtain an appraisal by a professional for your home. The lender will usually request this, and the cost is typically included in your closing costs. Make sure that your house is neat and tidy. There’s no have to make any major changes, but catching up before the deadline can leave an impression on the appraiser. So can an mowed yard that has been freshly cut.
8. Anticipate Your Needs for Closing
Refinancing a refinance can be similar to the time you first completed the closing of your home. Typically the lender will schedule an appointment with a notary public to sign all the documents. You can attend this meeting at a time or location that works for you. If the loan being refinanced is in your name and in someone else’s, such as your spouse’s, you’ll both require your presence to sign.
When the paperwork is completed and you’re ready to begin paying your monthly installments to your new lender, as stipulated in the closing documents. Any new rates or terms will also be in effect so that you can begin to pay down the home loan you refinanced.
FAQs
How does refinancing a mortgage affect my credit score?
A mortgage refinancing can temporarily decrease your credit score because the lender will conduct an investigation of your credit score in the process of applying. It is usually a minor decrease and will recover over time, provided you pay on time and in a regular manner. In addition, the mortgage will be noted as paid off on your credit reports which could be beneficial to your credit score in the future.
What are some reasons I might not qualify for a mortgage refinance?
If your credit score has drastically diminished since you first took out your mortgage, you might not be eligible for a competitive interest rate, which makes refinancing less advantageous. In addition, if your ratio of debt-to-income is excessive, you might not be eligible. Also in the event that you do not have enough equity in your home (usually at minimum 20 percent) then you might not be eligible for certain kinds of refinancing.
Can I refinance my mortgage with bad credit?
While it might be more challenging to refinance your mortgage if you have poor credit, it’s not impossible. Certain banks specialize in lending to people with poor credit, while government programs such as the FHA refinance loans might have lower requirements for credit scores. However, you should be aware that you could be offered higher rates of interest.
How much does it cost to refinance a mortgage?
Refinancing a mortgage usually comprises an origination charge and an application fee as well as an appraisal fee as well as closing expenses, in addition to other costs that could be incurred. It is typically between 2 and 6% of the amount of the loan. In some instances you may be able to add these costs into your loan to cut the cost of your out-of-pocket expenses when you close.
Can I refinance my mortgage more than once?
Yes, you are able to refinance your mortgage several times. It is important to take into consideration the costs associated with refinancing, like closing costs, as well as possible penalty penalties for prepayments as well as the advantages you’re hoping to receive. You should ensure that refinancing is financially sensible every time.
What’s the difference between a cash-out refinance and a rate-and-term refinance?
In a refinance with cash-out, you get an additional mortgage that is greater than the amount you currently owe, and you then you receive the extra amount of cash. This is a great option when you need to pay major expenses or consolidate high-interest debt.
A rate-and-term refinance in contrast will alter the rate of interest, term length or both, of your existing mortgage however you don’t get any cash. This typically happens to reduce monthly payments or to make the loan payoff faster.
When should I consider a fixed-rate mortgage over an adjustable-rate mortgage?
A fixed-rate mortgage might be a better choice for those who plan to remain within your house for a lengthy duration and need regular, steady monthly payments. In contrast, an adjustable rate mortgage (ARM) could initially offer an interest rate that is lower however, it could fluctuate over time. An ARM might be a viable option if you intend to refinance or sell your house before the interest rate begins to adjust.
