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We understand that making payments on a home mortgage is not easy. You can blame it on an unstable economy, high-interest rates on mortgages, or simply a lack of financial expertise on your part. If you too find yourself in this situation, maybe it’s time to ask yourself, “Can I refinance my house?”
Yes. You can. However, before considering refinancing, you need to have the right knowledge about it. Ignorance will hurt you more than help. You may end up paying more over time due to the high fees and closing costs, or because of having a longer loan term or a higher interest rate.
This article will help you understand the ins-and-outs of refinancing your mortgage and answer all your queries.
What is refinancing?
Simply put, refinancing is a process in which you get a new mortgage to replace the original mortgage. Basically, you pay off an existing loan and replace it with a new one.
There are various reasons why homeowners plan on refinancing their house. These could include getting a lower interest rate, a need to shorten the term of their mortgage, consolidating debt, tapping into their home equity to raise funds, or financing a big purchase.
Most borrowers with a good credit score make use of refinancing to change their existing variable loan rate or adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa.
What credit scores do you need to refinance your home?
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The minimum credit score for a conventional refinancing is 620 to 680 on average. However, if you have a score of 740 or higher, you can expect the best rates on the market.
Keep in mind that refinancing can be risky for those with a blemished credit score. While it’s very much possible to get a home loan with bad credit through programs such as FHA loans, DA loans, etc, it’s not recommended. You need to make sure your credit is good enough to qualify for the best refinance loans. It’s best to improve your credit score before applying for a loan.
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When should you refinance your home?
Refinancing can be a good decision for you if it helps you save money, build equity, and pay off your mortgage quickly. And, if you get good interest rates, refinancing can even benefit those with a fairly new mortgage.
Refinancing your house can indeed be quite advantageous. In many cases, homeowners get the benefit of lower market interest rates, they can reduce their monthly payment with a longer repayment term, or cash out a portion of their home equity.
The rule of thumb that you should follow when refinancing is that if you can reduce your interest rate by at least 2%, then refinancing is totally worth it. Most lenders believe that even a saving of 1% is enough of an incentive to refinance.
How does refinancing work?
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Refinancing your mortgage works on the principle of getting a second mortgage loan to pay off your first loan. It works in many different ways. For instance, if you want to get rid of private mortgage insurance after reaching 20 percent equity in your home, refinancing is a great option for you.
Also, it’s a good way to switch from an ARM to a fixed-rate loan with a steady monthly payment. Or, if you want to shorten your loan term from a 30-year loan to a 15-year loan.
Consumers who want a lower monthly payment because they have other expenses, such as college tuition or auto loan, also prefer a refi.
You can even opt for a cash-out refinance whereby you can borrow more money than you owe on your home for a credit card debt consolidation or to pay for any major home improvement or renovations.
Here’s an important heads-up for you. While paying off your credit card balances with a lower-interest loan is a good move, you must avoid racking up the card balances repeatedly. You will only be increasing the risk of losing your home to foreclosure. As your mortgage is secured by your home, any default in your mortgage payments will cost you dearly.
It’s best to consult with a mortgage professional to determine if refinancing your house is indeed a good idea.
What does the refinancing process involve?
Refinancing a mortgage is easier if you know exactly what your goals are. Whether you’ve opted for refinancing to reduce your monthly payments or to shorten the loan term, you need to keep a process in place.
Here are some steps that you must follow for a hassle-free mortgage refinancing:
- Shop for the best mortgage refinance rates and fees on the market.
- Choose 3 to 5 lenders to apply for your mortgage.
- Submit all your mortgage applications within a two-week period.
- Compare each lender’s loan estimate.
- Select the best refinance lender according to your requirements.
- Lock your interest rates.
- Try to close on the loan before the rate lock period expires.
How long does it take to refinance a mortgage?
Most refinance mortgage processes close within 30 days. Refinancing is quicker today thanks to many lender’s websites offering their services online. You can read about the different loan products, compare their interest rates, fill out your loan applications, and submit all the required documents.
How to calculate your break-even point?
Closing a refi loan comes with a closing cost. It’s generally 2 to 5 percent of the principal amount of the loan. For example, if you’ve borrowed $200,000, at a closing cost of 3 percent, you would owe $6,000 at closing.
You can calculate how long it will take for the mortgage refinance cost to pay for itself. And, also how long it will take for you to break even. To calculate the break-even point, you must divide the total closing costs by the amount of money saved each month with your new payment structure.
Here’s another pro-tip: Do not plan to sell your house before your break-even point, or else refinancing will not be worth it and you will lose big money.
Refinancing your house is a good strategy if you have enough equity in your home or want to consolidate your debt into one monthly payment. If your new mortgage offers you a significantly lower interest rate than your existing debt, you could end up saving big money.