6 Things You Didn’t Know About Mortgage Refinancing
Mortgage refinancing is taking out a new loan to pay off your existing mortgage. You can refinance with the same lender or a different one, and you’ll typically need to qualify for the new loan just like you did for your original mortgage. There are several reasons you might want to refinance, including getting a lower interest rate, switching from an adjustable rate to a fixed-rate mortgage, or taking cash out of your home equity.
Are you thinking about refinancing your mortgage? If so, you’re not alone. In fact, according to data from the Mortgage Bankers Association, applications for mortgage refinancing are at an all-time high. But before you jump on the refinancing bandwagon, there are a few things you should know about this financial move. Here are six things you didn’t know about mortgage refinancing.
1. Mortgage Refinancing is Not the Same as a Loan Modification
Many people mistakenly believe that refinancing and modifying a loan are one and the same. But they’re not. A mortgage loan modification is when you work with your lender to change the terms of your loan, usually to make it more affordable. This could involve extending the loan term, lowering the interest rate, or changing the type of loan. Refinancing, on the other hand, is taking out a new loan to replace your current one. You might refinance to get a lower interest rate, a different loan term, or to tap into your home equity.
2. You Don’t Need Perfect Credit to Refinance
Your credit score is one factor that lenders consider when you apply for a mortgage refinance. But it’s not the only factor, and you don’t need perfect credit to get approved. In fact, you may be able to qualify for a refinancing loan even if your credit score is in the 600s.
Lenders typically require a credit score of 620 or higher for a conventional refinance loan. But there are some government-backed programs, such as the Federal Housing Administration’s (FHA) Streamline Refinance and the Veterans Affairs’ Interest Rate Reduction Refinance Loan, that may allow you to qualify with a lower credit score. To improve your credit score, however, make paying down high credit card balances a priority.
3. Educating Yourself About Mortgage Refinance Is Important
You’ve probably seen the commercials about refinancing your mortgage and how much it can save you each month. The process of refinancing a mortgage can be a great way to save money, but it’s important that you understand the process and what it entails before making any decisions.
There are a lot of factors to consider when refinancing, and it’s not a decision that should be made lightly. Take the time to speak with your lender and learn as much as you can about refinancing before making any decisions. One of the primary things to do or the best way to understand refinancing is to educate yourself and do the right things. This may require some work on your part, but the investment will be worth it in the end. Plus, the internet is a great resource for learning more about refinancing.
4. Get Organized and Know Your Numbers
When you’re ready to start the refinancing process, one of the first things you’ll need to do is get organized and know your numbers. This means having a clear understanding of your current financial situation, as well as your goals for refinancing.
You’ll need to know:
- The balance of your current mortgage
- The interest rate you’re paying on your current mortgage
- The remaining term of your current mortgage
- The value of your home
- Your credit score
- Your monthly mortgage payment
- Your current monthly expenses
This may seem like a lot of information, but it’s all important in helping you determine if refinancing is the right move for you. Once you have a good understanding of your current financial situation and what you hope to achieve through refinancing, you can start shopping around for the best mortgage refinance rates.
5. There are Different Types of Mortgage Refinances
There are many types of mortgage refinances and each has its own pros and cons. Some of the most common refinance types are:
Rate/Term Refinance: This type of refinancing involves replacing your existing mortgage with a new one at a lower interest rate or for a different loan term. This can help you save money on your monthly mortgage payments and/or overall interest costs.
Cash-Out Refinance: With a cash-out refinance, you replace your existing mortgage with a new one and take out equity (cash) from your home at the same time. This can be used to pay for home improvements, consolidate debt, or do anything else you may need cash for.
Streamline Refinance: A streamlined refinance is a simpler and faster way to get a new mortgage, without all the paperwork and hassle of a traditional refinancing. This can be especially helpful if you’re already employed with the same lender.
6. You May Need to Pay Mortgage Points
Mortgage points are fees paid to the lender at closing in exchange for a lower interest rate. One point equals 1% of your loan amount, and paying points can lower your monthly mortgage payments.
While refinancing normally involves paying some fees and costs out-of-pocket, you may be able to wrap these expenses into your new loan if you don’t have enough equity. If you’re considering refinancing your mortgage, here are things you need to know about mortgage points.
- Mortgage points are fees paid to the lender at closing in exchange for a lower interest rate.
- One point equals 1% of your loan amount.
- Paying points can lower your monthly mortgage payments.
- You may be able to wrap refinancing costs into your new loan if you don’t have enough equity.
- If you’re considering refinancing your mortgage, make sure you compare rates and terms from multiple lenders to get the best deal.
- Be sure to ask about any prepayment penalties or other fees that could come with refinancing before you sign on the dotted line.
Refinancing your mortgage can be a great way to save money, but it’s not right for everyone. Be sure to do your homework and compare rates and terms from multiple lenders before making a decision. And remember, if you have any questions about refinancing or the process, don’t hesitate to educate yourself first and ask professionals for help.