Understanding Mortgage Refinancing
For many people, a mortgage payment is one of their largest monthly expenses. You can lower your payment by refinancing your mortgage, freeing up funds to use for an assortment of other financial goals in the process. Here are some important things to understand about refinancing your mortgage.
You Need to Identify Your Goal for Refinancing Your Mortgage
Before you start contacting lenders, decide what your goal is for refinancing the loan. This can help you decide what mortgage type may work for your needs. People often want to lower their payments, either by extending the terms of their loans or receiving lower interest rates. Other homeowners might want to shorten the lifetimes of their mortgages. Maybe they want their loans gone faster so they can comfortably retire, or perhaps they want more room in their budgets for travel.
If your home has equity, that means the amount your home is worth is more than what you owe on the mortgage. In that case, refinancing to a cash-out mortgage is one way to access this equity. Common reasons to opt for a cash-out refinance include paying for educational costs, completing home renovations, paying down debt and funding important life events.
Your Finances Matter
Before applying for a new loan, it’s a smart idea to make sure you’re as financially sound as possible. Start by checking your credit. Your credit history is one of the most important details used by your lender when deciding whether to approve your refinance. It also influences the interest rate you receive on the loan. A lower interest rate means a lower monthly loan payment.
Though many conventional lenders approve mortgages for borrowers with credit scores as low as 620, these loans for people with lower scores have higher interest rates, reports Bankrate. A credit score of 670 is considered good, while a score of 740 is very good.
You can improve your credit by making loan payments on time and paying down the balances on your credit cards and lines of credit. Most lenders also require some type of income verification, so make sure you have a couple years of tax returns and recent paycheck stubs on hand.
Your Home’s Value Is Important
Your lender may require that you have some type of equity in your home. If you owe more than your home is worth, this can make it more difficult (but not completely impossible) to refinance your loan. Though a formal appraisal may be necessary at some point in the loan process, your lender has tools to approximate the value of your home. Once you have a rough idea of your home’s value, your lender can calculate the interest rate you’ll receive on your loan and determine if you’re eligible for a cash-out refinance.
You Should Contact Multiple Lenders
It’s important to contact a few lenders to check out your options for refinancing your mortgage. Each lender has its own criteria and mortgage programs. By exploring multiple lenders, you can compare the terms of your loan to make sure you’re getting the best deal possible. Information to compare includes the fees associated with the loan, your loan’s interest rate and the loan programs available to you.
Make Sure It’s a Smart Decision to Refinance
When you refinance your mortgage, you’ll have to pay fees and expenses for the new loan. It’s important to run the numbers to check that refinancing can yield long-term savings.
A conventional guideline states that if interest rates are a percentage lower than your current rate, it’s cost-effective to refinance, according to Investopedia. However, you should run the numbers yourself to see how long you need to stay in your home for refinancing to make sense.
For example, if refinancing has fees of $3,000 and reduces your mortgage payment by $150 a month, you’ll recoup the cost of the loan fees in 20 months. If refinancing reduces your mortgage by $75 a month, you’ll recoup the fees in 40 months. Make sure you’re going to hold the loan long enough to realize the benefits.