The term “mortgage refinancing” in the United States of America is majorly used by homeowners. As complicated or complex as the term might look, it involves a simple process. Most homeowners, if not all, make use of this process to pay for their mortgage loans.
The process of refinancing a mortgage primarily involves the taking of loans for the purpose of paying off an outstanding mortgage loan. This may sound easy but homeowners must be enlightened in various ways to remain safe. That is they must be able to
– take advantage of the interest rates of a lower market
– reduce the payments they make per month with a long-term repayment method, and
– Make use of a portion of their equity
The process of refinancing a mortgage is similar to the processes involved in getting one. These processes or steps involved in getting a mortgage involve; shopping around for a suitable mortgage lender and comparing the interest rates they offer. After which you will need to compare their offer to your current loan. These processes help homeowners in the sourcing of the most suitable mortgage lender with the best offer.
In as much as it is essential to consider the following processes, focus on the closing costs. For instance, if it will cost you a $5000 upfront payment to refinance your new loan, with a new monthly payment that is $100 lower than your current loan; you will need to stay in your home for at least fifty years, else moving would not be worth it.
Although keeping an eye on the closing costs is essential, watching out for prepayment penalties is crucial. Prepayment penalties are one of the factors that cause problems to homeowners trying to refinance their mortgages. In which they will be faced with penalties for early paying off of mortgage or refinancing again.
Ultimately, you could be a beneficiary of a more favorable term, if there is an I’m provement in your credit since your initial approval.
Generally, the refinancing of mortgage loans is meant to pay off existing loans. Meanwhile, this is not done at random on any day or season. There are rather several reasons homeowners decide to refinance their mortgage loan. Although there are a variety of reasons, the most significant reasons include the following:
– Lower interest rate and payment
– Change rate type
– Cash out
– Change in the loan term
Lower interest rate and payment
This depends on the market rate and your credit since your first loan. These factors determine how well you would be able to save money on lower interest rates and monthly payments. You can, however, save money from a drop in the market rate and improvement in your credit.
Change rate type
This reason depends on how adjustable your original mortgage may be. If the rate of your current mortgage is adjustable, switching to a loan with a fixed rate is essential. This is primarily because it will save you from the fluctuation of rates
If your home’s equity is significant enough, you will be able to take out a portion of it. This is usually done with a refinance for the payment of bills and the refinancing of purchases.
Change in the loan term
This primarily involves the shortening of your loan term to be a beneficiary of a lower interest rate. Hence, you will be able to save money over time. At the same time, you can also lower your monthly payments by increasing the length of your loan term.
Although the refinancing of mortgages may be beneficial, it may also come with limitations. The possible limitations that come with the reason for refinancing your mortgage include the following:
– You may be faced with a higher amount of loan in your new mortgage loan. Which may occur if you cash out a portion of your home’s equity. Hence, increasing your monthly payments
– An increase in the market rate would render your good credit irrelevant. Hence, you would not be able to benefit from a lower interest rate
– You may more interest in the lengthening of your loan term, and
– Ultimately, getting a better term with a new loan is not guaranteed
“How do I qualify for a refinance loan?” is one of the questions homeowners new to refinancing usually ask. The criteria required for qualifying for the mortgage loan are the same for a new mortgage loan. The lender you source will consider the following factors:
– Credit score and history
– Payment history on an existing loan
– The value of your current home
– Your home’s equity
The offer you will receive from your lender will depend on the risk you pose to them. Hence, you may be a beneficiary of better terms in your new loan if you have a good credit history, reasonable incomes, and incredible equity in your home.