Refinance Your Mortgage
Refinancing your mortgage involves taking out a new loan in order to pay off your original mortgage. There are many advantages to refinancing your mortgage, as it can allow you to take advantage of lower interest rates in the market, cash out a portion of your equity that you’ve built up in your home, and/or reduce the amount of your monthly payments by extending the length of your repayment term.
Mortgage refinancing may sound great on the surface, and in many ways it is. However, before delving in, it’s important to know the ins and outs – as well as the pros and cons – of exactly what refinancing is and how the process works.
How Does Mortgage Refinancing Work?
Refinancing your mortgage is actually quite similar to how you got your initial mortgage in the first place: go out and start comparing interest rates and terms offered by various lenders to see which one best meets your individual needs. Once you have found a good one, you want to compare it with the terms of your existing mortgage.
Your credit is vitally important throughout this process, if it has improved since you took out your first mortgage, you will have a better chance of qualifying for more beneficial terms when you go to refinance.
Another thing to bear in mind when you are looking to refinance your mortgage are closing costs. For example, if you have to pay $5,000 upfront when refinancing your loan with a new lender, and your new monthly payment is only $100 lower than what you were paying on your first mortgage, you would need to be residing in your home for a minimum of 50 months to make refinancing worth it.
Another thing to be wary of are prepayment penalties; If you pay off your mortgage early or refinance yet again, these can cause you problems in the future.
Why Do People Refinance Their Mortgages?
There are many reasons why a homeowner would want to refinance their mortgage loan. Below are some of the most popular reasons to do so.
- Get a lower interest rate and monthly payment. If market rates have decreased or your credit has significantly improved since your first mortgage, it is very likely you will be able to get a lower interest rate and monthly payment and save some money.
- Cash out. If you have equity built up in your home, refinancing your mortgage may allow you to cash out some of that equity and use it for a variety of purposes, such as paying bills, repairing your home, or going on a vacation.
- Change rate type. Some mortgages have adjustable rates, and thus are subject to market fluctuations; refinancing your mortgage can allow you to change that to a fixed rate if you wish to avoid that uncertainty.
As you can see, there are a lot of potential benefits to refinancing your mortgage. However, there are potential issues as well, which we will outline below.
- You could end up paying more interest if you lengthen your loan term.
- You could end up with a higher loan amount on your new mortgage loan if you cash out a portion of the equity built up in your home; this could result in a higher monthly payment.
- You may not be able to get improved terms over your old mortgage loan.
- An improved credit score may not be sufficient to assist you in getting a lower interest rate if market rates have increased significantly since your first mortgage loan.
Three Different Types Of Refinancing
In general, there are three different types of refinance loans that a homeowner can apply for. Rate and term, cash out, and cash in. Below we’ll lay out the specifics of each one of these.
- Rate and term finance loan. The goal of this loan is to change the interest rate, the loan term, or both without making any changes to the actual amount of the loan. If you’ve just switched your loan from an adjustable rate to a fixed rate or if you’re just trying to save money on your monthly payments, this might be the best loan for you.
- Cash out refinance loan. The name basically says it all. This loan involves cashing out a portion of the equity that you have built up in your home. This will result in a greater amount for your loan, with the increase usually approximately equal to the amount of money you have cashed out.
- Cash in refinance loan. This type of loan is less common, and is used when a homeowner wishes to reduce their new mortgage balance by adding some of their own funds when refinancing their mortgage loan. This type of loan might be useful if you’re underwater on your mortgage, want to keep your mortgage under a certain limit, wish to get rid of private mortgage insurance, or qualify for a lower interest rate.
Qualifying For A Refinance Loan
There’s not much of a difference between qualifying for a mortgage refinancing loan and a regular mortgage loan. Lenders in both instances will look over many similar factors to determine if you qualify, including:
- Credit history and score
- Payment history on your existing loan
- Income and employment history
- Equity you’ve built up in your home
- The home’s current value
- Other debt obligations
Depending on the standards of the lender and how you measure up against them, they will make you an offer for a loan based on the risk that you pose to them. You may be more likely to be approved for better terms on a refinancing loan if you have an excellent credit history, a solid income, and a great deal of equity built up in your home.
Things that would be detrimental to you getting better terms on a refinancing loan, or even getting the loan approved at all, are a lower credit score and/or increased debt since taking out your first loan.
Will Refinancing My Mortgage Affect My Credit?
It is possible that refinancing your loan will affect your credit score. Since this is the case, it’s important to always ensure you make the payments on your current loan on time and be careful when shopping around for better rates. Be sure to keep the following factors in mind:
- Every time you apply for a mortgage loan, the lender will do a hard inquiry on your credit report; this can always knock a credit score down a few points.
- Try to rate shop in a short period of time – between 14 and 45 days – because multiple credit inquiries in that amount of time normally only count as one on your credit report. If you spread the shopping process out over several months, however, that could cause a significant impact on your credit score.
- The length of your credit history could take a ding when your old mortgage loan is closed and replaced with a new one.
- If you miss a payment on your old mortgage loan during the refinancing process, your credit score could suffer.
However, if you’re diligent about your credit and are keeping it in great condition – in addition to keeping the above factors in mind – you really shouldn’t see much of a negative impact on your score. However, if your credit history is spotty, it could make it more difficult to get favorable rates or be approved for a new loan.
It’s always important to know how your credit is doing if you are considering applying for a mortgage refinance loan. Always check your scores regularly to make sure you know exactly where you stand, and if possible try to avoid taking out new credit before and during the refinance process.
I was in a very difficult place with bad credit, tons of bills, insufficient income to cover all my expenses, yet had a LOT of equity in my home that I could not access because of all the above. After having gone through one attempt to re-fi, and not having it work, Doug contacted me and assured me that he would do everything he could to help me get the refinancing I needed. It was a process and required a LOT of patience (which I am not very good with), and we were able to accomplish what I needed. Doug kept telling me that he was working on my case, and that things were progressing which gave me the reassurance I needed to make it through all the paperwork efforts! I would highly recommend Doug because he is dedicated, professional, AND local to Coloradoans”