Mortgage refinancing allows a homeowner to replace their current home mortgage loan with one that offers better terms. Typically, a refinance is only worth pursuing if it helps you get a lower payment or interest rate.
You may want to consider mortgage refinancing if you get other benefits, such as switching to a fixed mortgage loan from an adjustable rate or when cashing out equity. Another reason to seek home mortgage refinancing is when you want to pay off your current loan faster or to avoid continuing to pay Federal Housing Administration (FHA) mortgage insurance.
The first factor you need to consider is how much equity your home has. This determines your mortgage refinance rate. If the current value is less than when you took out the mortgage (this is called “negative equity”), then it may not make much financial sense to seek mortgage refinancing.
Your equity shows how much you can borrow. This is based on your loan-to-value (LTV) ratio, and generally, the lower the LTV, the better. There are, however, several exceptions, such as USDA streamline and FHA streamline, which are lenders that don’t consider LTV.
Your home is collateral for the mortgage loan, and most refinance lenders will want a home appraisal. The mortgage refinance offers you are likely to get can be affected by how much your home appraises for. An appraisal is the value of your home, and is conducted by a certified professional. Without a current and accurate estimate, you can easily end up paying too much to refinance your mortgage.
Before seeking refinancing, it’s prudent to know your credit score. Your credit score helps determine what type of loan you can qualify for and how much interest you will pay. Before seeking refinancing, you may want to work on improving your credit score, particularly if it lies on the lower side of the scoreline. Tactics that boost your credit score over time include working to curb your debt, controlling your spending, and paying all your bills on a timely basis.
When refinancing, a key objective is to get the lowest possible interest rate, as that will maximize your savings. A low-interest rate will make the refinance worth the effort. You can use an online loan estimate app or mortgage refinance calculator to compare refinance rates. Reach out to different mortgage financiers and compare loan details before deciding.
Just as when taking out a normal mortgage loan, you must also pay closing costs before you finalize your mortgage refinance transaction. You can expect the refinancing closing costs to be anywhere between 3 and 6 percent of your home purchase price. This is an important consideration because you need to make sure you can meet these costs before applying for a mortgage refinance.
If you cannot afford closing costs, your lender may agree to refinance your mortgage without these expenses. However, for that waiver and convenience, you will typically have to take on a higher mortgage loan interest rate. Your lender may grant you the choice of rolling your closing costs into your refinancing loan.
