What Does It Take to Refinance Your Mortgage?

If you are new to the mortgage world, you may quickly notice that people do not stick with their original mortgages for long. In the United States, mortgages tend to last around 30 years, but borrowers refinance at an average of every four years.

Think of refinancing as resetting the clock on your mortgage. A refinance is a replacement that pays off your current mortgage completely and gives you an entirely new home loan to work with. This may seem like a strange move, until you consider that all the terms of the refinance are up for change. Interested in a better rate? Trying to borrow a little more on your house equity? Want lower monthly payments? Prefer a shorter term to reduce interest? A refinance may be a sound financial decision for any of these reasons.

Of course, refinancing comes with dangers, too. A poor refinance can put you in a worse debt position than your original mortgage. Additionally, by resetting the clock, you are also resetting the 30 year term length, so unless you take out a shorter home loan, you may eventually pay even more interest. These pitfalls aside, refinancing can be an excellent way to create a more favorable loan or expand your financial options, but careful analysis is a must. Several key factors determine if you can (or should) refinance.

Market Rates

One of the key reasons to refinance is to access a lower or better mortgage rate. If you already have a fixed-rate mortgage and the market – or the Fed – has pushed interest rates down in the years since you first borrowed your home loan, your refinance could win you a lower rate. This means lower monthly payments and less interest overall. If you have a variable rate mortgage, switching to a fixed rate version could help you save money, even if the fixed rate is slightly higher. After all, that variable rate could climb much higher in the future if left as is.

These rate benefits are determined by the current mortgage climate. If you look around and find that interest rates are actually higher on average than when you first took out your mortgage, refinancing is a poor idea.

Credit Standing

Credit is a key component of refinancing. Lenders will examine your credit just as they did for your original mortgage. This is one reason you should pay off your first mortgage for several years before trying to refinance. It gives you time to build good credit and prove to lenders that you can responsibly handle a home loan.

If your credit history has improved enough, you may qualify for a lower rate despite market activity, making a refinance ideal. On the other hand, if you have made some bad debt decisions since your original mortgage, a refinance will not work. Request rates from several different lenders to see if their numbers differ. Switching to a new lender may be worthwhile if they offer better terms.

Income Levels

Do you have enough income to handle a refinance? If you are paying your current mortgage without any trouble, this is not a problem. But if you are struggling to make your mortgage payments from month to month, lenders will be quick to notice and will not offer you ideal terms. Keep in mind: income levels can shift in coming years, sometimes unexpectedly. Can you budget your money carefully and avoid future debt or default, no matter what surprises come along?

Future Plans

Why do you want to refinance? Many people use a refinance to borrow even more money on the value of their home, creating extra cash they can use for school, investment, or improvements. If the value of your house has increased over time, this cash-creation scheme could work. However, for most homeowners, house equity has fallen, sometimes below their current mortgage amount, resulting in negative equity. Refinancing for cash is not possible with negative equity, but government programs like HARP exist to help you get better terms.

Refinance Fees

Remember those loan fees for your first mortgage? Sometimes they reach thousands of dollars, often due upfront. Refinancing fees may rise just as high, including appraisals, applications, underwriting, and much more. Prepare to pay several thousand dollars for the process, and do the math to find out how this will affect your payments. Current refinance fees might negate future savings for years to come.

Wise Refinancing

Whether you want to consolidate debt, switch names on a deed, or just make monthly payments a little easier, a refinance can be your solution. Remember that good refinancing only works with careful research and preparation, so resist the urge to jump in without testing the water. To find out more about refinancing, visit:

Refinancing Right: Q&A

The Refi Site

Lender411: The Basics of Mortgage Refinancing

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