Refinancing Your Mortgage

The opportunity to obtain a lower interest rate is a top reason to refinance a mortgage loan. For homeowners who are in a bind, it’s a solution that can keep them in their home and preserve their credit, as a refinance can not only lower the interest rate on a mortgage loan, but also the mortgage payment.

Upsides

ARMs are ideal for people who envision themselves living in their houses for only a short length of time. If you plan to stay longer, you should go with a fixed rate. Predictable payments coupled with historically low rates make refinancing into a fixed rate mortgage an excellent deal for many people. Equity is the difference between your house’s worth and what you owe the mortgage lender, and selling your house is one way to tap your equity. But if you’re not ready to move, another option is a cash-out refinance.

You basically borrow against your equity and refinance for more than your house’s current principal balance. Then, use the additional cash to pay off your debt, make home improvements, start a business, or put toward your kids’ college tuition. Of course, this can also be a downside, as it gets you deeper in debt and may increase your mortgage payment. Plus, trading credit card and other unsecured debt for debt secured by your home could lead to you losing your home in the event that you can’t make mortgage payments. This wouldn’t necessarily be the case if you default on your credit card debt.

Downsides

You might excitedly apply for a refinance with the hopes of lowering your mortgage rate and saving money on your home loan each month. But if there’s been any change to your income or credit since applying for your original mortgage, this can stop a refinancing in its tracks.

Your income and credit are more important than ever. Mortgage lenders are cautious and will scrutinize your credit report and financial information, and may not approve you – or approve you at a higher rate – if your credit score has dropped or if you’ve recently suffered a job loss or a reduction in salary. Be aware that having an existing mortgage does not guarantee a refinance approval. Your lender may request copies of tax returns and recent paycheck stubs to verify your income.

The cost of a new loan is one of the biggest hurdles to refinancing. Some homeowners are caught off-guard when they’re required to pay closing costs, which range between 3% and 6% of the loan balance. Fees include the home appraisal, the application fee, the title search, the credit report fee, discount points, and the loan origination fee.

Mortgage-related fees are paid out-of-pocket at closing, but some lenders include these fees in your loan balance. Plus, if you’re refinancing into an FHA loan, for example, you’ll need to pay an upfront fee for mortgage insurance.

Home appraisals estimate a property’s worth, and they are inevitable when refinancing. The appraiser uses recent comparable sales in the community to assess a home’s value, and the results of an appraisal can make or break the deal. There are government refinance programs to help upside-down borrowers, wherein they can refinance with no equity. But if applying for a traditional refinancing, many lenders require some equity.

Read this informational US News article about 3 Home Mortgage Refinancing Nightmares, and this video on Mortgage Refinancing

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