As a proud homeowner, you may have a mortgage that you must pay back. Unfortunately, current events and personal struggles may have made payoff more difficult.
Luckily, a good idea to facilitate payments is to refinance mortgage. These may have lower interest rates or longer payment periods, so you can pay them off easier.
What is Refinancing
In a nutshell, refinancing is the act of replacing your old mortgage with a new one. Specifically, it involves paying the existing home loan for a new loan amount. This is a favorable option for those who have poor credit ratings. Otherwise, refinancing your home is inadvisable, especially when the economy is turbulent.
When it comes to refinancing your mortgage, there are two options: cash-out and rate-and-term. As the name suggests, the former lets you borrow at most 80% of the equity in your home. Your home’s equity is the difference between its current value and your existing mortgage. However, you may receive larger mortgage rates and a bigger amount from cash-out refinancing.
Nevertheless, you may refinance your mortgage via cash-out to cover certain expenses. Particularly, home renovations are the main reason for cash-out refinance. A mortgage may also be cashed out for payments beyond home improvement like student loans or medical bills. In addition, it can be used to pay back debts that have a higher interest like fixed-rate loans.
While cash-out relies on property values, the rate-and-term depends on reduced market interest rates. The latter lets you have a lower interest in mortgage payments, but only when market conditions allow it. Additionally, you may request for a shorter loan duration, so you can pay off your mortgage faster. It enables you to change your FHA loan into a conventional one, so you can borrow more.
Refinancing for Lower Interest
As we’ve mentioned, you may get lower interest rates if they are available. You should consult with your mortgage company and explore other loan options. Verify your refinancing options and loan terms such as refinance rates and closing costs. Lowering your monthly payments will definitely speed up paying the mortgage.
When to Refinance your Mortgage
Cash-out refi and rate-and-term refi are used for distinct reasons. The former is borrowed in order to cover expenses or other debts. Meanwhile, the latter lets you repay your mortgage faster.
Debt consolidation is a primary reason for cash-out refinancing, aside from personal loans and balance transfer cards. It involves paying off debts like credit cards with a lump sum that may be borrowed from home equity. Moreover, it can be used to cover expensive products and services since it’s a relatively affordable option.
On the other hand, rate-and-term refinancing can get you better terms to expedite mortgage payoff. It enables you to take advantage of lower interest rates available. It even shields your mortgage from market changes by switching your mortgage from adjustable-rate to fixed-rate. Even better, it may shorten your mortgage’s lifespan.
How to Pay Mortgage Faster with Refinancing
Now that you’re familiar with the definition and the uses of refinancing, you should understand the necessary procedure. The first step is to check your credit score in order to determine your eligibility. It must be 620 or higher, and you may get better mortgage refinance rates if you have good credit. Refinancing is still an option if you have poor credit, but you may have to put up with worse terms.
Next, you should figure out how much your intended interest rate is. Figure out how much your current finances can bear, and use a refinance calculator to help you. Then, you should explore all the options that may fit your needs. For instance, you may take out a home equity line of credit (HELOC) if you only need a relatively small amount.
After gathering options, it’s time to select a lender after mulling over your alternatives. Choose the best one and discuss your financial needs thoroughly. You want to make sure you and your lender are clear about your financial situation before proceeding. Take time to negotiate the terms and conditions you need.
Then, you must provide the required documents such as financial statements and tax forms. They may ask for additional documents though, so expect to spend some time providing those too. Afterward, wait for the offer and think it through once it arrives. If you’re certain about refinancing, sign the final paperwork, and you’re good to go!
Risks of Refinancing
Most importantly, it’s imperative to know the potential risks of refinancing. These are mainly due to failure in reading the fine print. For example, you may be charged by an exorbitant prepayment penalty upon signing the agreement. You might end up paying a whopping 85% or six months of the original loan’s balance!
You may be shocked by closing fees if you didn’t check, so ask your lender for specifics about all fees included. What’s more, you should check the Good Faith Statement that may charge for even more fees. Make sure the origination fee is around 1-1.5%, and the processing fee is $400 or lower. Never pay courier fees, application fees, administration fees, or anything similar.
Furthermore, be wary of unscrupulous lenders who may trick you into getting high interest rates. Some may even include arbitration clauses, forfeiting your rights and protections as a homeowner if you sign the contract. Worst of all, your home may be foreclosed if you fail to pay back refinancing.
