A mortgage is a long-term commitment, and your financial position and other circumstances may have changed dramatically since you first took out the loan. In some cases, refinancing can help you take advantage of more favorable terms.
Why Refinance Your Mortgage?
There are a lot of reasons you may wish to refinance your mortgage. Perhaps you want to reduce your monthly payments, or maybe you are in a better financial position and would rather take on a higher payment and pay off your home sooner.
Questions To Ask When Refinancing Your Mortgage
When you are refinancing a mortgage loan, it is important that you choose the right lender to take advantage of suitable products and the best interest rate available. Here are some good questions to ask prospective lenders.
What Types Of Loans Do You Offer?
First, you will need to know what type of loans each lender offers and which types qualify for a refinance. Most lenders will offer conventional loans that conform to the guidelines set out by Fannie Mae and Freddie Mac.
There are also some specialty loans that you may be eligible for, but not all lenders offer them. For example, a USDA loan is a government-backed loan that allows you to purchase a home in a qualifying rural or suburban area. A VA loan is a government-backed loan for veterans, members of the armed forces and their qualifying surviving spouses. It can sometimes be beneficial to refinance your current loan into a different type of loan. For example, homeowners who originally took out an FHA loan will sometimes refinance to a conventional mortgage once they have arrived at 20% equity so they can be free from the mortgage insurance requirement of FHA loans.
What Types Of Refinances Are There?
It is also important to find out up front which types of refinances a lender offers. A rate and term refinance will change the rate and term of your mortgage loan. This means that you could, for example, refinance a 15-year mortgage to one with a 30-year term or take advantage of a lower percentage in interest paid on your loan. Refinancing your rate or term can cause your monthly payment to change, but it should not impact your principal balance.
Another type of refinance is a cash out refinance, which allows you to take on a higher loan balance in exchange for accessing cash from your home’s equity. You might get a cash out refinance to access money to pay off credit card debt or to carry out renovations on your home. Your lender can explain the types of refinances they offer as well as the pros and cons of each one.
What Do I Need To Qualify For A Refinance?
You will need to ask each lender about their requirements to qualify for a refinance. For example, each lender will have a minimum credit score that is needed to qualify for each type of loan. Another figure that is likely to come up is the debt-to-income ratio, or DTI. This is a percentage that indicates to your lender how much of your income is spent on regular recurring expenses. Those who have a high DTI are less likely to have savings and also have a greater chance of missing a mortgage payment. Your lender can tell you the maximum DTI acceptable for each loan type and help you calculate your DTI.
You will likely need to have some equity in your home before refinancing. This is the percentage of your loan principal that has been paid off. Most lenders have a minimum requirement for home equity, so be sure to ask about this to see if you qualify.
What Fees Are Involved?
Much like when you got your initial mortgage, a refinance will involve fees. Some refinance fees are universal across lenders, such as fees for credit checks, recording fees, title fees, and appraisal fees. However, the lender’s fees, such as origination, underwriting and application fees, will vary from lender to lender and can add a significant amount of money to your closing costs.
How Will This Refinance Affect My Monthly Payment?
Be sure to ask how the type of refinance you choose will impact your monthly mortgage payment. If you refinance to a lower APR while keeping your term the same, you can expect your monthly payment to go down. Refinancing to a longer term will also result in a reduction in your monthly payments, but you will end up paying more in interest over time.
In contrast, refinancing to a shorter term will likely lead to a higher monthly payment but you will be able to own your home sooner. Your monthly payment may also increase when you choose a cash out refinance. It is important to ask your lender how a potential refinance will impact your monthly payment and to request an estimate of what you can expect to pay monthly should you decide to proceed.
What Mortgage Discounts Am I Eligible For?
First-time homebuyers are not the only borrowers who are eligible for mortgage discounts. Some refinancers can help you uncover any mortgage discounts that you may not have realized you are eligible for that could bring sizable savings at the time of refinancing.
Work With The Refinance Mortgage Experts
If you are considering refinancing your mortgage, work with the refinance mortgage experts at MyLendingPal. Their team of professionals can help you determine whether refinancing is the right move in your circumstances.