Getting a mortgage to buy a home is a long-term commitment, and it is not unusual for borrowers’ financial situations to evolve in the years after taking out the original loan. In some cases, the original mortgage can be refinanced to meet the homeowner’s current needs and abilities. So, exactly how does refinancing a mortgage work?
A mortgage refinancing loan entails taking out a new loan with different terms and paying off the original loan. Homeowners might choose to refinance their mortgage at some point to take advantage of more favorable market interest rates, reduce their monthly payments with a longer term of repayment, or cash out part of their equity.
Although the homeowner already owns the home when they refinance it, the refinancing process is similar to that of the original loan in many ways. First, homeowners will compare the rates and terms available across lenders to find an appealing offer and then see how it compares to their existing loan. There is a good chance that homeowners might quality for better terms if their credit has improved since they took out the original loan.
How To Qualify For A Mortgage Refinancing Loan
To qualify for refinancing a mortgage, homeowners need to meet similar criteria to those of a new mortgage loan.
Lenders will take a close look at the applicant’s credit history and score, employment and income history and other debt obligations. They will also consider their payment history on the existing home loan and the amount of equity that has been built up so far, along with the current value of the home.
Applicants who meet these criteria will be given an offer that reflects the risk they pose to the lender. Those with flawless credit, plenty of equity and good income may find it easier to get better terms. In contrast, those who have more debt or a lower credit score than they did when they got their first mortgage might find it difficult to get more favorable terms.
Will Refinancing Affect My Credit?
There are several ways in which a refinanced mortgage could impact credit. First, applying for the mortgage will place a hard inquiry on a homeowner’s credit report, which could drop their credit score by a few points. Although multiple inquiries across a short period of time (typically up to 45 days) generally only count as one on a credit report, those who shop for better rates across a period of several months may see their score drop noticeably.
In addition, closing the previous mortgage loan and replacing it with a new one could affect the homeowner’s length of credit history. It is important to remain attentive, as missing a payment on the old loan during the refinancing process could also lower a person’s credit score.
Borrowers who already enjoy good credit are unlikely to notice a big effect on their credit history from refinancing, but those who are already on shaky ground could see the odds tipped against them if they are not careful.
Why Should I Refinance My Mortgage?
The question of whether to refinance is a complex one, and there are many factors to take into account when deciding if it is the right move. Here is a look at some of the top reasons homeowners might opt to refinance their mortgages.
Lower Interest Rate & Monthly Payment
One big reason many people seek a mortgage refinance is a reduction in the overall market rates. Mortgage interest rates are constantly fluctuating, and refinancing is very popular when these rates dip. Those who have seen a big improvement in their credit since taking out the original loan can also benefit from refinancing. In both cases, homeowners might be able to save on interest with a lower monthly payment and reduced rate.
Ability To Cash Out
Homeowners who have built up significant equity in their home might opt to cash out part of that equity via refinancing to cover bills, buy out a former spouse in a divorce or pay for a major purchase.
Change Loan Rate Type
Homeowners whose original mortgage carried an adjustable rate may later seek to switch to one with a fixed rate to offer protection against market fluctuations. Conversely, borrowers with fixed-rate mortgages who anticipate a prolonged drop in interest rates might wish to switch to an adjustable-rate mortgage. This can also be a sensible move for those who plan to move within a few years.
Adjust Loan Term
Some homeowners find that they can qualify for a better interest rate by shortening their loan term. For example, moving from a 30-year mortgage to one lasting 20 or 15 years could result in a lower rate. This allows them to save money on interest throughout the loan’s lifetime and is a popular choice for borrowers who have seen a significant increase in income. Meanwhile, extending the loan term can help to lower monthly payments.
Reach Out To A Professional For Refinancing Your Mortgage
The mortgage terms you agreed to a few years ago might not be the right terms for you today. There are lots of factors to consider in a refinance, and it is important to ensure the benefits outweigh the risks before proceeding. Reach out to the professional mortgage brokerage at My Lending Pal for expert guidance on the best path to take in your situation.