Many people think they will never apply for another mortgage once they purchase their house and take a 20-year mortgage. After some years, you may decide to refinance your mortgage. But what is a mortgage refinancing, and what are the steps to apply for it?
What is mortgage refinancing?
Refinancing means getting another home loan to replace the existing one. You take another mortgage loan to clear the first mortgage to save some money. Refinancing your mortgage helps cut the monthly payments, reduce interest rates, and allow you to tap on your home’s equity. Refinancing your mortgage can also help get rid of private mortgage insurance.
How refinancing reduces your monthly payments?
Many people refinance their mortgage loans if they are struggling to raise the required monthly payments. Going for a lender with a low-interest rate helps reduce monthly payments. You can also reduce your monthly payments by extending the loan term. Remember, extending your loan term will increase the amount of interest you are to pay.
How refinancing makes you pay your loan faster?
Refinancing a 20-years mortgage with a 10-years loan allows you to pay off your loan faster. In such a case, you reduce your interest amount, making your pay less. The downside of this is making your monthly payments rise.
When to refinance your mortgage?
The best time to refinance your mortgage is when the interest rates fall and go below where they were when you were applying for your first mortgage. You can also consider refinancing your mortgage when your credit score improves. A higher credit score makes you qualify for another loan with a lower interest rate.
FHA mortgage insurance premiums are increasing your monthly payments. You can get rid of mortgage insurance loans when you have accumulated enough equity. Refinancing lets you switch to another lender that won’t require mortgage insurance.
Some people refinance their mortgage when they need to cash out from their home’s equity. You can refinance your mortgage when you want to borrow more than you owe. It can help get lower interest rates and cash-out your home’s equity. It is known as a cash-out refinance.
How to refinance your mortgage
The process of refinancing your mortgage is similar to that you used to get a mortgage for your home. Here are the steps to refinancing a mortgage loan:
1. Setting a financial goal
Why do you want to refinance your mortgage? Is it to reduce the loan term or its monthly payments or get rid of the mortgage insurance premiums? Or do you want to pull out equity for debt payments and home repairs?
For whatever reason, you should keep in mind that restarting the clock of your 20-year mortgage loan may reduce your monthly payment and increase the life of your loan.
2. Checking credit score and history
You may want to refinance your mortgage, but if you don’t qualify, the lenders won’t approve your request. Lenders look at your credit score to determine whether to approve your refinancing request. It is worth boosting your credit score some months before applying for a mortgage refinance.
3. Determining your home equity
Home equity refers to the value of your home less the amount you owe your current mortgage lender. You can check your current balance in the mortgage statements. To know the real value of your home, get a real estate agent to do the analysis for you. Your home equity is the difference between the current value of your home and your mortgage balance. The more equity you have, the higher the chances of getting a mortgage refinance at lower interest rates.
4. Shop around
Getting quotes from multiple banks or lenders can help save some dollars. It is not compulsory to refinance with your current lender. Different lenders have different interest rates and closing fees. Getting three to five quotes will help ensure you’re getting competitive rates. Quotes from multiple lenders will boost your negotiation power.
5. Choose a lender
When choosing the best lender, compare their interest rates, but don’t forget the closing fee and other charges. Some offer no closing costs but higher interests. Some will add the loan balance to substitute the closing cost.
6. Lock your rate
Many homeowners forget to lock their rates. It is very important as it prevents the lender from changing interest rates in a specified period of time.