Do you want to find a way to lower your mortgage payment, or get your home paid off faster or get cash-out? If you have answered yes to any of the above, you should look into refinancing your mortgage. You should carefully consider your options as you contemplate refinancing your home. Before you make any decisions, it is important for you to understand the terms of your existing loan. Dust off that plastic folder that’s crinkled up in the back of your file cabinet or (even easier) go to your lender and ask what your current terms are for your current mortgage.
Did I just hear you sigh? I understand. No one wants to think about mortgages. It’s easier just to send in your payment every month . . . until the end of time . . . regardless of whether or not you are getting a good deal on your current mortgage.
It’s time, my friend. Let’s take a look at your current home mortgage. You could be eligible for a better deal on your mortgage, but you won’t know unless you ask. Don’t put it off any longer.
Consider the following if you are interested in a home refinance:
1. Your interest rate
Obviously, if you can get a lower home mortgage rate by refinancing your mortgage, this may be something you should consider doing. Consider using those savings to shorten the duration of your mortgage. If you can reduce the term of your mortgage from a 30-year to a 15-year loan.
2. The term of your loan
Do you want to retire? Maybe you just want a less-stressful, but a lower-paying job. Are you itching to pay off your mortgage? Think about refinancing to change the term of your loan. Do you have a 30-year mortgage? Consider going with a 15-year term. Home mortgage rates are sometimes lower for shorter-term loans.
3. Whether you have a fixed or an adjustable-rate mortgage
For many homebuyers, an adjustable-rate mortgage (ARM) is attractive due to the lower payments. The risk with an adjustable-rate mortgage is that after the first interest rate adjustment, your monthly payments could go up. Some homeowners think it makes sense to refinance to a fixed-rate mortgage from an adjustable-rate home loan. Check out your lender’s closing cost before making your decision to see if this makes sense for you.
4. Your past credit score
Did you have some blemishes on your credit report in the past? Did that financial mistake keep you from qualifying for the best mortgage rates? If you have cleaned up your credit, your FICO score may have increased. Benefit from cleaning up your past mistakes by checking into a home refinance.
5. What type of mortgage do you currently have?
If you didn’t qualify for a conventional home loan the last time you went through the process, you might consider refinancing now. If you didn’t have a lot of cash for a down payment, you might be paying for mortgage insurance now. To replace your current mortgage, consider going through a refinance. If you no longer need to pay mortgage insurance, then refinance your loan so you can stop paying it.
Figuring out whether it is a good idea to go through the process of refinancing your house is complex. Besides the items listed above that need consideration, you also need to factor in closing costs of the new loan, tax implications, and your overall financial health.
Talk with a mortgage professional about refinancing. Whether you talk with a certified financial planner or mortgage lender, take action! Having a mortgage is a grown-up business, so act like a grown-up and make sure you have the best possible mortgage.
Frequently Asked Questions About Home Mortgages & Refinancing
Most people who want to purchase real estate need a mortgage. Eventually, many of them refinance their mortgages for a variety of reasons. Both refinancing a mortgage and qualifying for an original mortgage can seem a little scary. But, when you are armed with a bit of knowledge about the process, you can dismiss those fears. With that in mind, here are answers to some common questions homeowners have about mortgages and refinances.
What is mortgage refinancing?
Mortgage refinancing is trading your old mortgage for a new one. Most homeowners want to refinance their mortgage for either a lower interest rate or a different mortgage term. Some homeowners might refinance from a 30-year fixed-rate mortgage to a 15-year fixed mortgage. Others might refinance from a variable rate mortgage to a fixed-rate mortgage.
What is rate and term refinancing?
- Loan amount remains the same.
- Reduced interest rate.
- Adjusted term such as 30-year fixed to a 15-year fixed rate.
- Converting from adjustable-rate mortgage (ARM) to fixed-rate mortgage (FRM).
What is cash-out refinancing?
Cash-out refinance is a type of mortgage refinance where you take out part of your home’s equity in cash. When you take advantage of a cash-out refinance, you get a mortgage for more than you owe for the house. Then, you take the difference in cash. You can use the money for many purposes, from home improvements to paying for college tuition. Many homeowners use the money to consolidate high-interest non-mortgage debt.
Consider how a mortgage broker has helped Melissa consolidate high-interest debt with a cash-out refinance. Melissa had $96,268 in home equity at the time of the refinance, and her home in Orlando was appraised at $250,000. She was paying around 21% interest on $35,932 in non-mortgage debt. After considering her options, Melissa applied and qualified for a cash-back refinance. Although her mortgage payment went up by $320 a month, she reduced her monthly non-mortgage debt installment by $882. By eliminating her non-mortgage debt with the money she cashed out her home, Melissa ended up saving $562* a month.
For more information about cash-out refinancing, contact a mortgage broker today.
How do I know how much home equity I have?
The equity in your home is the difference between the amount you owe on the home and what your house is worth. If you aren’t sure, you can check your current mortgage to find out how much you owe on your house. A home appraisal will determine the value of your home. Then, the lender will divide what you owe on the house by the home’s value to get your Loan-to-Value (LTV) ratio. Most lenders need the LTV to be 80% or less to approve your refinance. If you have home equity below 20%, you need to pay for PMI (Private Mortgage Insurance).
What is PMI?
Private Mortgage Insurance (PMI) pays the lender if you stop making payments. The cost of PMI depends on the amount you owe on your mortgage compared to its value and your credit score. To avoid having to pay for PMI, make a down payment that is equal to or greater than 20% of the purchase price of the home.
How do I get the lowest mortgage interest rates?
Many factors determine mortgage interest rates. Your credit score is significant. Your credit score has three digits and predicts how likely you are to pay back a mortgage. The higher the score, the more likely you are to pay back a loan. People with the highest credit scores get the lowest interest rates. Lenders also want to see that you have an income that has been stable for at least two years. They also want a low Debt-to-Income (DTI) ratio. Lenders determine your DTI by how much you owe for various debts and housing divided by your income. A lower DTI might help you qualify for a lower mortgage interest rate.
Another way to get a lower interest rate is to shorten the term of your loan. Mortgage refinances of 10 or 15-years generally have lower terms than 30-year mortgages.
Many people lower the mortgage interest rate by paying for discount points or mortgage points. Discount points are fees paid to the lender at closing in exchange for a lower interest rate. This is also called “buying down the rate.”
Contact a mortgage broker to talk about interest rates.
What is the difference between fixed- and adjustable-rate mortgage refinances?
Fixed-rate mortgage interest rates don’t change. Adjustable-rate mortgage (ARM) interest rates do. An adjustable-rate mortgage can go up or down. The advantage of a fixed-rate mortgage is that the interest doesn’t ever increase. The benefit of an ARM mortgage is that the introductory interest rate is often lower than a fixed-rate mortgage. Some of them also cap how high the interest rate can go. Likewise, some of them cap how low it can go, too. Both types of loans can be optimal, depending on your circumstances. Ask your mortgage broker about the differences between fixed and adjustable-rate mortgages.