If you are considering getting into home refinance, you’ve come to the right place. This in-depth guide gives you all the information you’ll need to get started…
What Is Mortgage Refinance?
Mortgage refinance is the process of paying off an initial mortgage loan by applying for a new one. Most homeowners go with this option in order to cash out part of their home equity, reduce monthly payment, or to benefit from the lower interest rates.
Refinancing — How Does It Work?
Applying for a refinance mortgage isn’t much different from applying for a normal mortgage. An individual would normally start by searching for various mortgage lenders and comparing their terms and interest rates. Once the person has found the best offer, he/she will then compare it to their existing loan’s terms.
If the individual’s credit has gotten better since the first loan was approved, the chances of finding better terms goes up. The applicant needs to pay attention to the closing costs as he/she goes through this procedure.
It’s also important to keep an eye out for prepayment penalties and such; these can end of causing issues for you down the line if you refinance again, or pay the mortgage off early.
Refinancing Loans — What Are The Different Types?
Here are the different types of refinance loans and how they work…
Cash-In Refinance Loans
This option is a bit less common than others. With this option, an individual refinances his/her mortgage loan, then reduces the new mortgage loan balance by putting more money in.
This option is ideal for those who are overwhelmed by their current mortgage, want to be able to qualify for lower interest rates, or discard private mortgage insurance.
Term-and-Rate Refinance Loans
This is the ideal choice for those looking to switch from adjustable rate loans to fixed rate, or just want to save some money on monthly payments. The goal of this loan type is to change the loan term, interest rate, or even both without adjusting the loan amount.
Cash-Out Refinance Loans
With this option, the applicant cashes out part of his/her home equity. As a result, the loan amount will be higher. The difference will normally be equivalent to the cashed out amount.
This option is more suitable for homeowners who need to get cash quickly for certain uses. The main disadvantage of this option is the higher monthly payment and interest rate.
Why Should I Consider Refinance Mortgage Loans?
Homeowners decide to refinance mortgage loans for various reasons. Here are the most important ones for you to consider…
Using mortgage refinance, an individual can cash out part of his/her home equity in order to finance large purchases or pay bills. However, this will only be possible if the individual has significant equity.
Lower Payment And Interest Rate
The applicant might be able to spend less money on interest as a result of lower monthly payment and a lower interest rate. Visit https://www.investopedia.com/ for more information on interest rates.
This will only be possible if the rates have come down since the first loan created, or if the individual’s credit has gotten better.
Loan Term Change
Most times, an applicant will qualify for lower interest rates if they shorten their loan term. For instance, if the term is reduced from about 30 years to 25 or 10 years, the individual can reduce the amount of money spent on interest throughout the loan’s life.
On the other hand, if the individual decides to lengthen the loan term, they can significantly reduce their monthly payment.
Rate Type Change
If an applicant’s original mortgage had an adjustable rate, he/she can avoid fluctuations in the market by switching to a fixed-rate loan
Disadvantages Of Refinance
While there are various benefits of mortgage refinance, there are also certain pitfalls which one should keep in mind. First of all, you can end up spending more money on interest if you lengthen the terms of your loans.
Furthermore, if an individual cashes out part of their home equity, it will increase the price on the refinance mortgage. This in turn, can end up increasing the applicant’s monthly payment. In addition to this, there’s no 100% guarantee that the applicant will receive more favorable terms on his/her new loan.
How Does One Qualify For Refinance Loans?
Refinancing mortgages requires qualifications similar to what you’d need for new mortgage loans. There are several factors lenders will keep in mind; for instance, they’ll want to know your existing loan’s payment history.
Lenders will also want to know the current value of your home, your employment and payment history, your credit score and history, debt obligations and home equity.
Once an individual has met the standards of a lender, he/she receives a loan offer according to what risk the lender perceives you pose.
For instance, if the applicant has great home equity, solid income and flawless credit history, they have better chances of getting more favorable terms with their new loan. Click here to learn more about home equity.
On the other hand, if the individual’s credit score has dropped since applying for the first loan, it is highly unlikely that they will get satisfactory terms on the loan.
Refinancing loans are a great option for homeowners thanks to the various benefits. Before rushing to start this procedure, it’s very important to sit down and properly learn how the refinancing process works, and what the drawbacks and advantages are.