A mortgage refinance is a process that lets you pay off your existing home loan and restructure it to fit your current financial needs. It can be an excellent way to lower your interest rate, reduce your monthly payment or shorten the length of your mortgage.
It can also be used to tap your home equity for home improvements, debt consolidation or to pay for a vacation. However, it can be risky if you haven’t been responsible with your finances and have not saved enough money to pay off the new mortgage.
Refinancing your mortgage is a major financial decision and not every borrower will benefit from it. To make sure it makes sense for you, consider the following factors:
Why You Want to Refinance
One of the primary reasons homeowners seek out a mortgage refinance is to save money on their monthly payments. This can occur for several reasons, such as when rates fall and the homeowner wants to lock in a lower interest rate or to eliminate an adjustable-rate mortgage (ARM) and get a fixed-rate loan.
Another common reason for a refinance is to consolidate other loans, such as credit card debt, into a single debt with a lower rate. It’s also common for borrowers to replace an FHA mortgage with a conventional one, to get rid of lifetime FHA mortgage insurance required on loans backed by the Federal Housing Administration.
The goal is to reduce your monthly payment and save money over the life of your mortgage. The key is to find the right lender and mortgage term that fits your budget and situation.
Your credit score is a crucial factor in your eligibility for a mortgage refinance, and it’s important to understand how it affects your ability to qualify for the best rates available. Your credit score is based on the information in your credit report and is affected by your debt-to-income ratio.
If your credit score is below 760, you’re more likely to get a lower rate than if it were higher. You can improve your credit score by paying bills on time, keeping your balances low and disputing any inaccurate information on your credit report.
You’ll also need to have a good idea of your cash flow, which includes the amount of income you receive and the expenses you incur. Having sufficient savings to cover your refinance closing costs, which can range from 2 percent to 5 percent of the loan amount, is key.
A reputable mortgage lender will walk you through scenarios to help you determine whether it’s worth it to refinance your mortgage. The lender will calculate all associated costs, including property taxes and homeowners insurance, to show you how much you can save over the life of your mortgage with a different term.
The mortgage refinance process can take weeks to complete and can result in a temporary drop of your credit score. It’s a good idea to have a financial planner look at your situation before you decide to refinance, so you can be confident you’re making the right move for you and your family.