What is mortgage refinance?
Mortgage refinance means taking out a new loan to pay off an old home loan. The borrower initially takes a loan to purchase the property. This initial loan is also termed purchase money loan. Some borrowers do this whenever the rates drop. These people, also called serial refinancers do this more often. Borrowers refinance their loans to get better interest rates. However, refinancing mortgages are not suitable for everyone. They can be risky for some borrowers. For borrowers with good credit, it is a great idea to change your interest term by refinancing your mortgage, but it may not work out for borrowers with bad credit.
Advantages of refinancing
One of the main advantages of mortgage refinancing is obtaining new loans at lower credit. The higher your credit score, the higher your chances of getting low interest loans. There are chances that you can increase your credit score with time. This means you may be eligible for loans you did not qualify for previously. When you improve your credit score, you can refinance your mortgage with a low interest loan. You can save a little on interest when you do this.
Refinancing your mortgage can also help you to obtain a huge amount of money to fund a purchase. In most cases, when people take loans to buy houses, they improve on the house. This increases the value of the property. The borrower gets enough money to pay off the remaining mortgage and also make other purchases.
It is advisable to refinance your home loan only when you intend on staying in the property for a long time. This is because you will pay processing fees, taxes, and closing costs on loan you are getting. If you stay in the house for long, you will be able to offset all these costs by staying in the house for an extended period.
You need to calculate the breakeven point to see it the refinancing is worth it. The breakeven point is the point where the savings you made from the refinancing covers the fees you paid during the refinancing process. If you stay in the house for the period longer than the number of months it will take to break even, then you can proceed with the loan refinancing.
Is it always a great idea to refinance your mortgage?
There are also risks involved in refinancing your mortgage. You may pay up some penalties for paying off your mortgage with the new loan. Sometimes, these fees are usually expensive and may take up all money you will make from the refinancing. If that happens, you may end up running at a loss. You will also pay fees during the loan refinancing. The fees may also take up some of the cash you will be making after you have refinanced. It is essential that you calculate all these and see if your new loan can cover all these costs before you proceed to finalize the process. If it will not, there is no need to refinance.
When is the best time to refinance my mortgage?
You cannot refinance your mortgage after a few months of obtaining the original loan. Most lenders expect that you refinance your mortgage after at least 12 months. However, all lenders have terms and conditions which differ from one lender to the other. You should check your lender’s terms and conditions to know their provisions on loan refinancing. When it comes to refinancing, many borrowers refinance with their original lenders. The original lender is likely to offer you a better rate with your new loan than a new lender. That lender does not need to go through certain processes such as title search again.
Reasons why you should consider refinancing
Refinancing can help you lower your monthly payments. If the prevailing interest rates are lower than the interest rate on your loan, you can consider refinancing your mortgage. This can reduce your monthly payments and also reduce your loan term. You can make monthly savings on interest rates.
You can also cash out some of your home’s equity when you refinance your loan. Since the value of most homes increases due to improvements, the value of the house also increases. Refinancing your mortgage offers you extra cash to pursue other projects.
Refinancing your loan attracts some expenses that may vary in cost depending on the loan package. However, all lenders charge these fees. The first fee is the processing fees. Lenders will charge you for processing your loan request. This charge also includes the review of your credit report and all other paperwork.
Lenders also charge title insurance and title search charges. The lenders need to search public records to know if the property belongs to you. This comes at a cost, and the lender will add it to your fees. This fee also includes the cost of the insurance policy that covers the property’s title.
An attorney usually does the closing of the mortgage. The attorney will charge lenders for conducting the closing. Their attorney may also conduct settlements. All these costs will be transferred to the borrower.
Lenders also impose points on the borrower at the closing. These points are designed to help the lender earn an amount that is will compensate for the interest rate the lender would have earned on the mortgage. One point is equal to one percent of the loan amount. Lenders also charge origination fees for evaluating the loan.
Due to the numerous fees charged for refinancing, it is recommended that you check to make sure you will break even before you decide on loan refinancing.
Home refinance process
The first thing you should think about when you want to refinance your loan is the goal you intend to achieve after refinancing. You should not decide to refinance just because other people are doing it. Most people aim at reducing their monthly payments and or shorten their loan term through loan refinance.
- Check your credit score
You should next check your credit score. The credit score determines the interest rate you pay. A high credit score will help you to obtain a loan with a low credit score. If your credit score is low, you can consider raising it by lowering the balance on your credit card or paying off some of your debts. You should also check your credit history while checking your score.
- Value your home
The next thing to do is to value your home. You can start by researching the cost of similar properties in your neighborhood. You can effectively do this by checking out the selling price of such properties on the real estate market.
- Look for reasonable rates
You can then check mortgage rates online. The best way to find a reasonable rate is to look at many options. You can look at the numerous offers and compare them. However, you should limit the number of companies you submit your application to.
- Analyze the costs of the loan refinance
Refinancing can attract lots of fees including origination fees, title search, and points. You should estimate these fees to have a rough estimate about the amount you will pay as fees. This will help you to make an informed decision. You can successfully refinance and save some money if you know exactly how much cost is involved in the process. If you decide to go ahead and refinance without knowing much about the fees, you may end up losing out. Lenders can help you to get good estimates of the total fees you will pay for the refinancing.
- The next action to take is to put your paperwork together
Lenders usually ask for pay stubs, banks statements, and other documents. You should get these ready to make the loan process easy.
You can also lock your rates with your current lender so that the rates do not change during the loan request process.
You should also keep some cash on you to make payments for expenses you will incur during the loan process. After doing all these, you can contact the lender you intend to refinance with and then begin the process.