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Should You Refinance?

Should you refinance

 

Many homebuyers use the equity that they own in their homes to refinance their mortgage. There are multiple benefits to refinancing a mortgage loan—however, there are specific times that can benefit the homeowner significantly more. That’s why it’s important to think about when and if you should refinance your home.

Refinancing allows you to pay off your current mortgage by financing a new loan. Lower than normal interest rates can have many homeowners considering refinancing. Refinancing can allow the loan recipient to “cash out” the value that they have invested in their home in order to make another large purchase, work on home improvements, invest in other ventures, or lower additional debts. There is also the possibility that a homeowner could refinance their mortgage for new loan terms, such as a lower annual percentage rate or monthly premium. In best cases, both goals can be accomplished at the same time.

If the factors involved in securing your first mortgage have changed—for example, a better credit score, income increase, or improved banking history—you could qualify for a decreased monthly mortgage payment

Aside from the benefits of refinancing, there are also some costs. The process of refinancing a home is estimated to cost 3 - 6% of the original loan amount in order to finalize a new mortgage. These costs come from home appraisal costs, closing fees, and new escrow account setup.

Did you know that the best time to refinance your mortgage is the last month of the quarter? March, June, September, and December typically provide you the lowest APR rates.

 

So why refinance?

To lower your monthly payment

This is the most popular reason to refinance. If the factors involved in securing your first mortgage have changed—for example, a better credit score, income increase, or improved banking history—you could qualify for a decreased monthly mortgage payment if you refinance.

Interest rates are low

Many homeowners will refinance their loan when annual percentage rates (APR) are low. How much lower do they need to be? It depends on the outstanding balance of your existing mortgage. Large mortgages see significant payment reduction with only ½% lower rate, while smaller mortgages would need a rate more than 1% lower to justify the cost and effort.

Your credit has changed

If your credit score has changed for the better, you have a strong chance of finding better mortgage terms. First-time homeowners, who may have been building credit at the time of their first mortgage, may have a good chance of getting a better mortgage premium and APR.

To change your mortgage type

If you want to shorten the duration of your loan, change the mortgage type, or find a mortgage with new terms, refinancing is a smart option. If you have an adjustable rate mortgage (ARM), it is smart to refinance a fixed-rate mortgage so that you do not have to pay a larger monthly premium due to the adjusted rate.

 

Follow these steps to refinance your loan

1. Understand the equity that you own in your home

The percentage of your first mortgage that you have repaid, in percentage to your new appreciated home value, will affect the amount that you need to refinance. However, you may be able to refinance the whole value of your home.

2. Get your home’s estimated current value

In order to have your home refinanced, you may have to have the home’s value appraised. This can be beneficial if the housing market has changed for the better, your home has been renovated or improved in a way that adds value, or if your neighborhood market has increased in value or demand. Call your local lender when needing help estimating your home’s current value.

3. Learn your current credit score

Check your credit score before you apply for a new loan. If you did not have established credit when you signed your first mortgage but have made payments on time, then your credit score may have improved. If your credit score has remained the same, you will need to rely on other factors, such as increased income or high equity to get a lower monthly premium or APR.

4. Check current interest rates

Check the interest rates at the time of your refinancing attempt.

Refinance Calculator

5. Use a refinance calculator to figure out what your payments could be

Use a refinance calculator, like the one shared above, in order to build a realistic goal for what you would like your monthly premium and APR to be.

6. Shop for a rate and speak to mortgage lenders

After researching interest rates, look for a mortgage lender that will meet your needs. Refinancing can be more attractive to lenders because you are already approved for a previous loan, meaning that you are an ideal customer.

7. Look into HARP

The Home Affordable Refinance Program (HARP) is a federal program of the United States that was established in 2009 and was intended to help “underwater” or “near-underwater” homeowners to avoid foreclosure. In order to qualify for HARP, the following must be true:

• The mortgage is owned or guaranteed by Fannie Mae or Freddie Mac

• The mortgage was sold to Fannie Mae or Freddie Mac on or before May 31, 2009

• Borrowers are current on mortgage payments with no payments having been made more than 30 days late in the last 6 months and no more than one late payment in the last year

• The property type must be a primary residence, one-unit second home, or a one-to-four-unit rental property

• The current loan-to-value (LTV) ratio must be at least 80%. There is no maximum LTV limit for a new fixed-rate mortgage. The maximum LTV for a new adjustable-rate mortgage is 105%

• You cannot have previously refinanced under HARP

Refinancing is a large benefit of being a homeowner for several reasons. Homeowners may use the value of their home to improve their loan situation or to make a large investment. Whatever your reason for refinancing, follow the steps above in order to get the best options for your loan.

 


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