Refinancing a mortgage is a powerful tool that can help you to save money on your home payments. Refinancing your mortgage takes advantage of your positive payment history and may enable you to lock in lower interest rates, obtain more agreeable repayment terms, or lower the amount you pay each month. You may even be able to add in the cost of needed home repairs as part of your new mortgage loan.
As with any loan, you have to qualify for a refinance. There are a number of factors that can influence whether you are able to refinance your home loan, including things like the value of your home, how much you still owe, what your credit score is and how able you are to repay the loan. It can be more difficult to refinance in periods of economic turmoil, but even then, it isn’t impossible.
How Refinancing Works
While it’s pretty common for people to talk about refinancing a mortgage, not everyone understands exactly what’s involved with a refinance. Though it’s typically talked about as if it were a loan modification, a refinance is usually a new loan that pays off and replaces the original mortgage. The refinance loan has its own interest rate and repayment terms, typically based on the amount that’s remaining on your home purchase. It is possible to do what is known as “cash out” refinancing, however, increasing the amount that you owe to take advantage of home equity and get cash for major purchases, debt consolidation or other expenses.
While you can refinance with the same lender that issued your mortgage, this isn’t actually required in most cases. Many homeowners shop around at different lenders to make sure that they get the best possible deal on their refinance loan. While this won’t always get you a substantially better deal on a loan, in some cases the time spent comparing lenders can result in significant savings.
Major Refinancing Considerations
There are a number of things that can affect the deal you get on a refinance or if you even qualify for a refinance loan at all. Some of these are well known and will affect pretty much any loan you might try to take out. Your credit score can have an impact, as can your debt-to-income ratio and the stability of your job. The remaining balance on your mortgage versus the value of your home can also affect your ability to refinance.
This can make things a bit more difficult if you’ve spent time out of work or laid off due to factors outside of your control; you’ll need to be able to explain these breaks to lenders and prove that you have the means to repay the loan. Economic unrest may also make some banks hesitant to issue as many large loans, meaning that your credit score and income will have to be a bit higher than usual to net a good deal on a loan. This won’t apply to all lenders, of course, but the fact that this can have an effect is important to keep in mind when shopping around for a refinance.
Is It a Good Time to Refinance?
Deciding whether it’s the right time to refinance depends a lot on you and your personal situation. Some people refinance to get their finances under control or to cover needed house repairs, so these reasons will have at least some influence on the timing of the loan. If you’re not under this sort of pressure, then you have a bit more freedom to pick your timing. It never hurts to shop around and check on possible deals, though if you find that you’re having trouble finding lenders willing to work with you or aren’t seeing the money-saving deals you want, then you always have the option to wait for rates (and possibly your situation) to improve.