Whether you need one or more of these questions answered, you need to be careful when choosing to refinance your mortgage.
Plus, understanding refinancing will help you decide if refinancing your mortgage is even for you.
What does refinance mean?
Mortgage refinancing is choosing a new loan to pay off your old mortgage. The main reason most homeowners in the United States refinance is to take advantage of the new lower interest rate and get a better, affordable loan.
For example, if you took out a mortgage 20 years ago at an interest rate of 8%. You can refinance it today with the current interest rate which is less than 4%, which can save you a lot of dollars per month.
Before you start refinancing your mortgage, let’s take a look at the pros and cons of refinancing.
Why is refinancing a good idea?
Lower interest rate
This is one of the main reasons homeowners refinance. When you see a drop in interest, it’s an opportunity to seize. Experts say it’s better if you can lower your interest rate by at least 2%.
Even if you can reduce it by 1%, that’s enough savings for you.
Plus, lowering your interest rate helps you increase the rate at which you accumulate equity in your home.
Fixed interest rate
Unlike variable rate mortgages where the interest rate can increase at any time, especially a few years after you take out the mortgage.
When you refinance your mortgage, you can now choose to charge a fixed interest rate that will never change until you pay off the loan.
Why is refinancing a bad idea?
Closing cost
Refinancing costs money, which includes closing costs. The average closing cost to refinance your mortgage is between 2% and 5% according to Mortgage Reports.
So, if you are planning to refinance a loan of $300,000, you would have to pay a closing cost between $15,000 and $6,000.
According to a Bankrate “If a homeowner is planning to move within the next five years, they may not get as much benefit from a refinance. Often the costs (of a refinance) could outweigh the benefits.
So if you paid that hefty amount to refinance your mortgage and move out later, you haven’t gotten your money back. You are lost.
bad credit
If you had a great credit score when you first took out your mortgage and then your credit score went down before you applied for a refinance. Your mortgage refinance rate may be higher than your original mortgage rate.
The minimum credit score for conventional loans is 620, while for FHA loans it is 580. So you need to maintain a minimum of these credit scores to get a good mortgage to refinance.
Do you get money back if you refinance your home?
Simple answer, yes!
This is called a cash-out refinancing. Where you replace your existing mortgage with a new one with lower interest. This allows you to withdraw a lump sum portion of the equity in your home.
Equity is the money you will get when you pay off your mortgage. Or the difference between the mortgage and the value of your home.
What do you need to refinance your home?
In order for you to refinance your home, you must first find out if you are eligible (Newsflash: most homeowners are eligible).
So, in this session, you will see some necessary tools that should be in your toolbox.
Credit score
Yes, a credit score comes back into the limelight, it is because of its importance in refinancing. In fact, it is very important for everything related to loans in the United States.
To refinance your mortgage, you need a good credit rating. Credit score ranges from 300 to 850 and an adequate credit score is 620 and above for conventional loans. And, 580 and up for FHA loans.
Lenders need your credit score to determine your ability to repay.
This credit score can determine if you qualify for a refinance and the mortgage rate it will give you.
Wait the minimum amount of time before refinancing
It depends on the lender you want to approach and the type of mortgage you need. You may have to wait a few months after stopping your original mortgage to refinance your mortgage.
For a conventional lender (cash-out refinance option), you must wait at least 6 months after closing your initial mortgage.
But, for an FHA loan (withdrawal option), you have to wait 6 months to a year after closing your original mortgage.
Considerable home equity
The lender will also look at the equity in your home. What is its strength?
According to research, it is best to have a minimum of 20% home equity before refinancing. This is more necessary if you want to do a cash-out refinance.
However, if your equity is below 20% and you have a favorable credit score, you may still be offered refinancing. But, you might get a higher interest rate.
Plus, there’s no consideration on home equity when you don’t go for the cash refinance option. If you just need an interest rate reduction and you have a good credit rating, you can easily get your application.
