Several homeowners think about refinancing their mortgages for a variety of reasons. While someone might refinance for a lower interest rate, someone else might choose this path to move from an adjustable interest rate to a fixed-rate mortgage. In any case, knowing how the process works is crucial in determining if mortgage refinancing is the best option for you.
Refinancing a mortgage does not involve making changes to the terms of your existing mortgage. Instead, it involves replacing an existing mortgage with a new one. This requires applying for a new mortgage, and once a lender approves your application, it repays your old loan. After this happens, you need to start making repayments toward the new one, and the previous mortgage no longer exists. Some people even choose to consolidate their other debt into a new mortgage.
Since refinancing a mortgage requires applying for a new one, you need to meet certain eligibility criteria. These depend on the type of mortgage you select although some lenders have their own requirements as well.
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One of the most common questions surrounding refinancing a mortgage is “Is it always possible to refinance a mortgage?” In several scenarios, it is possible to refinance a mortgage without needing to wait. Exceptions come in the form of:
The 12-month waiting period that applies on cash-out refinancing does not apply if you’ve inherited the property or received it through a separation or divorce.
Applying for a mortgage requires meeting credit score requirements and this is no different with mortgage refinancing. More often than not, the minimum credit score you need depends on the type of mortgage you select, although some lenders have their own minimum limits. Here are the minimum credit scores you typically need to qualify for different types of mortgages.
If you don’t meet this requirement, it is best that you work on improving your credit score before applying for a new mortgage.
Home equity refers to how much of your home’s value you own. This is the amount you stand to receive if you sell your home and pay off your mortgage entirely. When it comes to conventional and cash-out refinancing, you typically need at least 20% equity to qualify. However, some lenders can go down to 10%.
If you have less than 20% equity in your house, you may check if you qualify for VA cash-out refinancing. While the Department of Veteran Affairs allows eligible applicants to refinance with no equity at all, most lenders who provide VA loans tend to cap it at 10%.
Your debt-to-income (DTI) ratio indicates how much of your monthly income goes toward servicing your debt. It requires dividing the total of all your monthly payments by your gross monthly income. You get to see this number as a percentage. Most lenders look for DTI ratios of 40% or lower. The higher it is, the more difficult it is to qualify for mortgage refinancing. If your DTI is higher than 40%, consider reducing your debt before applying for a new loan.
No matter which type of mortgage you wish to get, you may expect lenders to take a close look at your income because it has a significant effect on your ability to repay the loan. As a result, you will need to provide proof of income that comes in the form of your employment history, tax returns, W-2s, 1099s, and recent paystubs.
When it comes to mortgages for self-employed borrowers, you’ll need to provide tax returns for the preceding two years, year-to-date balance sheets, business account statements, and profit-loss statements. Applicants with W-2s may look forward to a simpler process.
Not everyone refinances a mortgage for the same reason. Here are the most common reasons to consider refinancing:
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The process of refinancing an existing mortgage is largely the same as the one you follow when you apply for it in the first place. This is because you need to apply for a new mortgage and a lender needs to approve your application. However, you need to begin by establishing a clear goal. For example, do you want to lower your monthly payment, extend the loan term, or use the equity you’ve built? Then, you need to follow these steps.
Bear in mind that there is no such thing as a no-cost mortgage refinance and you will need to pay closing costs. However, several lenders give you the option of rolling the closing costs into the loan. This way, you don’t have to pay closing costs at the onset but get to pay them through the course of the loan term because they become a part of the principal amount.
When interest rates fall, it’s common for homeowners to wonder if they might benefit by refinancing their existing mortgages, and there are other advantages as well. However, it is prudent to look at the negative side of refinancing before moving forward with the process.
Advantages of Refinancing a Home Loan
Disadvantages of Refinancing a Home Loan
If you choose to take the mortgage refinancing path, you get the ability to change the terms of your mortgage by lowering your monthly payments or paying it off sooner than initially planned. Besides, it can also give you access to funds if you want to use the equity you’ve built in your home. However, as with any major financial decision, it’s important that you weigh the pros and cons, and you may also want to discuss it with your financial planner.
Once you determine that refinancing a mortgage is right for you, take time to compare your options, be it in the form of the types of mortgages for which you may qualify or the lender you should select. Remember that choosing a reliable mortgage provider can make your refinancing process seamless and rewarding.
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