An Intro Guide To Mortgage Refinancing

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By guest writer Jessica Kane

If you are planning to buy a home or you already have one and you have taken out a mortgage on it, you need to understand what refinancing is, there are many home buyers guide books available on the market but often, those online can give a better understand as they’re constantly being kept up-to-date. The typical way of paying off your mortgage is to pay off the monthly instalments dutifully as agreed in the mortgage agreement. However, there is another option, which is refinancing your mortgage.

What is Mortgage Refinancing?

Mortgage refinancing refers to paying off a first mortgage with a second one. The loan is usually of the same size or less, and you use the same property as collateral for the new mortgage. At the end of the day, either you end up with a lower interest or you extend your repayment period.

What Refinance Options Do You Have?

There are various refinance options at your disposal as a homeowner. The options depend on what you are looking for in the refinance. These include:

  • Term refinancing – this is where you refinance to extend the term of the loan. For instance, if you have a loan you need to pay within five years, you can take out a new 15-year loan. The extended period gives you more time to get cash to repay the loan.
  • Rate refinancing – here is when you refinance the loan to a lower rate. Here is a typical scenario: you have a loan that has been running for five years at a fixed rate of say, 4.5 percent. You realize that market rates have reduced, and you wish to take advantage of the low rates. You can decide to refinance to an adjustable rate mortgage (ARM) that allows you to make use of a lower mortgage rate, say 3.7 percent.
  • Cash-out refinancing – at times, you have equity in your home that is lying idle. You can use this equity to get extra cash to pay for other needs. You can use the proceeds to consolidate debts or pay for your kids’ education.

What Should You Expect When You Decide to Refinance?

 There are several steps that you follow when you decide to refinance your existing mortgage:

1. Check your credit report

Your credit score plays a pivotal role when you decide to refinance. Typically, the lender requires that your credit score fall between 300 – 850 FICO. However, it can go lower, which is something you would not wish for. A higher credit score means that you can pay your debts on time, and you are a low-risk borrower. The lender will give you a better rate since the likelihood of defaulting is lower. On the other hand, a low credit score will attract high closing costs, a higher interest rate, and penalties. This is because you are a high-risk borrower. To compensate for this risk, you have to pay more in terms of fees.

If you have a low credit score, you need to correct it before you look for a lender because then, refinancing might not be beneficial. Request for your credit report and identify the errors before you go to the next step.

2. Determine the Mortgage Type

You need to determine the type of mortgage that suits your situation. This can be rate, term or cashout refinance. Understand the pros and cons of each type and try to compare it with your situation. If you are stuck, talk to an experienced mortgage broker to help you make a choice.

3. Choose a Lender

 There are different lenders, each providing a unique mortgage service. The rates, down payment, mortgage terms, and closing terms are some of the aspects that will guide you when choosing a lender.

4. Close the Mortgage

This is where you review the mortgage terms and prepare for an appraisal. An independent expert usually performs this evaluation. After providing all the requirements that the lender has asked for, the last step is closing the mortgage.

Lenders vary, and the process might be different too. For instance, some lenders might require you to raise a certain amount of down payment before you qualify.

Why Should You Refinance Your Mortgage?

You enjoy various benefits when you decide to refinance your mortgage. With a refinance, you stand to lower your mortgage rate. This allows you to save on your mortgage payments. You also get to reduce your monthly payments, which frees up your cash for other activities.

When taking out a mortgage, you get to choose between fixed or variable mortgage rates. However, refinancing your mortgage allows you to convert your existing fixed rate mortgage to a variable rate mortgage, or the other way round. You can change to a fixed rate if you desire for some steadiness in payments and to an ARM if you desire lower rates.

If you have several debts that you are finding hard to clear, a cashout can help you consolidate them. Alternatively, you can use the cash to renovate your house and increase its value.

A poor credit score puts you at risk of having your future mortgage applications rejected by lenders. One way to repair a poor credit score is to lower your monthly payments so that you can pay comfortably.

About the Author: Jessica Kane is a professional blogger who focuses on personal finance and other money matters. She currently writes for Checkworks.com, a leading supplier of personal and business checks.

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