What is Refinancing your Home: Basic Guide

Banks Editorial Team · May 3, 2018

What is refinancing? It means applying for a new mortgage that will replace your existing mortgage. The new mortgage will pay off your existing loan and you will have a new payment structure with a new interest rate, possibly even a new lender. The new loan will be based off of your current credit status and programs exist for applicants with all kinds of credit ratings. Your new loan will either be a Rate-and-Term or Cash-Out refinancing, depending on your existing home equity.

 

Refinancing Considerations

Your current home equity, income, and credit score will influence what is refinancing your interest rates and new payment plan. These are the three most important factors for every lender when negotiating a new mortgage.

Applicants with a high credit score will be offered better interest rates than applicants with a low credit score. Lenders are more willing to negotiate repayment rates with applicants who have a relatively high income compared to the loan they are financing.

Applicants with a large amount of home equity will be able to refinance for a lower amount or possibly even receive cash back from the new mortgage. Although refinancing your home can provide great benefits from lower interest rates or reduced payments, your existing loan may have features which would be lost in a refinancing.

The most important considerations in refinancing your home are your refinancing goals, your credit score and your existing home equity.

Your Refinancing Goals

Before you apply for a new mortgage, determine what your refinancing goals will be and whether you can meet them under current market conditions. What is refinancing if not a chance to get a fresh start and make some changes? If you can pay off your existing mortgage and secure a better interest rate or a lower payment, refinancing with a new lender can make a lot of sense. If your new loan comes at a lower interest and payment but an extended repayment schedule, you could wind up paying far more in interest over the lifetime of the loan. When you have built up a large amount of home equity on your existing mortgage, refinancing can put cash in your hand for unforeseen expenses. Even a beneficial interest rate and payment plan can be undesirable if it results in expensive closing costs out-of-pocket.

 

Your Credit Score

Check your credit score. Your credit score determines just what kind of interest rate your new lender is willing to offer on the loan. If you have excellent credit, you may be able to secure a much better interest rate your current one. Getting a better interest rate is what refinancing a home is all about for many people. It reduces the total repayment over the life of the loan and allows you to build up better home equity. A bad credit score does not mean you will not be able to refinance. FHA programs exist specifically to help homeowners with poor credit acquire a new mortgage. Refinancing at a higher interest rate is seldom desirable, but it can make sense if you expect to repay the new loan quickly.

Your Home Equity

Your current home equity is probably the single most important factor when looking at a new mortgage. What is refinancing your home? It’s a chance to take advantage of your regular payments and good stewardship in previous years. Your existing equity offsets the value of your home when applying for a new loan, possibly allowing you to finance an amount which is much lower than the value of your home. A less expensive loan means you can be free and clear of debt that much faster. Your home can also be a source of cash if you face unexpected expenses, refinancing your home can put cash in your pocket that you are free to use for any purpose at all. Once you’ve looked at your goals, checked your credit score, and determined your existing equity, it’s time to talk to a mortgage counselor.

What is Refinancing

It’s basically going through the mortgage application process all over again from the ground up. There are many types of refinance programs; it’s a good bet that several of them will meet your refinancing goals. Apply for a mortgage online or use an online refinancing calculator to get the ball rolling. Once you’ve made the initial contact, talk to your prospective lender and ask them about your options. Your mortgage counselor will be familiar with many government and private financing programs. If you are going to refinance your home, it needs to make sense to take such a large step. Get your information together and don’t be afraid to ask for more.

 

 

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