Refinancing a Mortgage: What You Need to Know

Refinancing a mortgage is an act of paying off the existing loan and replace it with a new one.  There are various reasons why you consider refinancing your mortgage which we have listed below.

Reasons Why You Should Refinance Your Mortgage

Lowering the interest rate

The interest rate on your mortgage significantly affects your monthly mortgage payment. If the interest rate is low, then your monthly mortgage payment is also little. Refinancing is good, especially when your credit score has improved or the market condition is favorable. Once the interest rate is low, you will be able to build your home equity quickly.

Adjusting the length of mortgage

Many borrowers opt to refinance because they want to adjust the length of their mortgage. Others want to increase the term of their mortgage so that they can bring down the amount they pay every month. On the other hand, there are people who prefer to decrease the term of their mortgage because the interest rate is low, plus they get to pay off their loan sooner. However, with a reduction in mortgage term, your monthly payment increases.

Change the adjustable rate mortgage (ARM) to fixed rate mortgage (FRM)

With adjustable rate mortgage, your monthly payment changes depending on the market condition. It can decrease or increase. If you are not comfortable with adjustable rate mortgage, then you should consider refinancing so that you can avail a fixed rate mortgage. By doing so, you can efficiently plan your finances because your monthly mortgage payment remains unchanged throughout the life of your loan.

Getting cash from the home equity

What is home equity? It is the dollar value difference between the value of your home and the remaining balance you owe on your mortgage. If the equity in your home has built up over the years, you can refinance for an amount greater than what you owe. You will be able to receive money from the difference in a cash payment. A lot of borrowers do this when they need money for certain purposes such as home improvement, hospitalization, and the likes. Getting money from the home equity is popularly known as cash-out refinancing.

Although this can be an enticing option, you have to be aware that when you take out the equity in your home, you own less of your home. Your home equity will build back up, but it takes time. If you wish to sell your home shortly, you will not be able to generate as much money after the sale. If you need cash, then you might want to consider other alternatives. Other than cash out refinancing, there is also home equity line of credit, home equity loan, and the likes.

Are you eligible to refinance?

To find out if you qualify to refinance or not, you have to go through the same approval process with your first mortgage. A lot of important factors should be considered such as your credit rating, income, assets, existing debts, the current value of your home, and the amount you want to borrow. You will be approved and even get a lower rate if you have an outstanding credit record. On the other hand, if your credit rating is low, you can still somehow qualify, but the interest rate is high.

The loan to value ratio is also one of the essential eligibility requirements. The lender will compare the amount you want to borrow and the current value of your home. If it does not meet the lending requirements, then there is a small chance that your request will be approved. Some lenders will grant your application, but the terms and conditions are less favorable.

Shopping for a new loan

When planning to refinance your mortgage, it is important to shop around so that you will be able to get the best financing deal. Other than your current mortgage lender, there are other lenders out there who will be more than willing to offer mortgage refinancing.  Shop around, make a comparison and do not hesitate to negotiate. Your negotiating skills can help you save not only hundreds but thousands of dollars. When shopping, make sure you get a copy of your credit report as it is one of the important things the lenders checked when applying for a loan. You have to make sure that the information is correct. Choose at least three lenders and compare their terms and conditions. Do not hesitate to ask questions, especially with regards to the loan features. As much as possible, you should request quotes, compare and study the figures for you to find out which lender offers the most favorable deal. It will also help if you are going to ask help and advice from somebody who is an expert in mortgage loans such as a mortgage broker, a lawyer, and other related professionals.

Refinancing with Freedom Mortgage

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