Refinancing is the action of repaying your existing mortgage by taking out a new loan, either from the same lender or from a different lender. The idea of a bank refinance a home loan is to get better rates and flexibility by paying off the original loan through refinancing. The most common reason for a person to refinance a home loan is to pay off the mortgage debt in one payment. Therefore, it is crucial you have enough capital for your new mortgage payments and that your credit history is free of any outstanding debts.
Refinancing can save you thousands of dollars each year on your home loan but be warned before you do so, there are risks. The lower your interest rate is, the lower your payments will be. This can be beneficial if you have trouble making an existing loan or need a more down monthly payment. The main risk in refinancing is that you may not be able to sell your home or refinance for a better deal later on. So, how do you know if refinancing is for you?
Table of Contents
Here are two questions you can use to determine if refinancing is right for you:
-What interest rate am I currently paying? The lower, the better because this saves you money.
-What are my monthly payments on the current loan? First, calculate the amount of money it would cost you to make these payments. Then, see if you can save a little each month by refinancing.
How Can You Refinance Your Home Loan?
There are several ways to refinance a home loan. The easiest way is to go directly to your current lender and ask for a better deal. You will often be asked for additional documentation like an account summary, income tax return, and bank statements. These documents show that you can afford the new loan and help the lender make sure you have enough money to repay the new loan. Now there is an option of refinancing from another lender, but your credit history must be free of any outstanding debts.
1) Understand why you want to refinance:
The reasons people refinance range from being able to consolidate debt on one mortgage and save on interest rates and monthly payments to wanting access to the equity that has built up in their homes. Be realistic. If you want a lower interest rate, you need to be prepared to pay the closing costs and real estate fees involved with refinancing.
2) Check your credit rating:
Your credit rating can affect the interest rate you are offered, so it’s essential to understand how your score impacts your refinance options. You may be able to refinance if you have a high credit score.
3) Do your homework:
Before you start shopping for rates, it’s essential to research the different types of loans and lenders that are available. Understanding the difference between fixed-rate and adjustable-rate mortgages, for example, will help you make a better decision about refinancing options. Know what you are getting into by reading the loan details, including whether there are closing costs and points.
4) Compare rates:
Once you have decided, the next step is to compare rates. Comparing shopping is the best way to validate your decision when looking for refinancing homes. You can compare per-loan or total-loan rates, depending on your needs.
5) Get pre-approved:
Before applying for a refinance, check to see if any lenders have pre-qualified you. Pre-qualifying is a form of preapproval that provides a general idea of what to expect in terms of cost and performance. The best pre-qualification is an actual approval, so make sure you get the best rate and phrases based on your credit history and financial profile. Remember that the lender may have already used your credit history in the pre-qualification process, so don’t waste time shopping around if you are denied qualification.
6) Apply only if you are getting a substantial rate reduction:
The sooner you apply, the more competitive your rates will be. A good rule of thumb is to get pre-approved within two weeks to give all of your lenders enough time to process your application. In addition, applying for a refinance early can save you money if your current loan is due. This is because you may be able to take advantage of the “prepayment penalty” that your lender will charge if you pay off your current loan early.
Conclusion
Refinancing a home loan is a great way to cut your monthly mortgage bills, but be very careful if you decide to take on the challenge. First, ensure you understand the risks involved in taking out a second mortgage. If you have questions about whether refinancing is right for you, speak with an investor mortgage broker, and he can provide help resolving your concerns.
