Refinancing your mortgage entails taking out a new loan to pay off your old one. Homeowners often refinance to benefit from lower market interest rates, cash out a part of their equity, or reduce their monthly premium by extending their repayment term.
However, before you begin the process, you should be aware of the advantages and disadvantages of refinancing as well as how the process works.
What is the Process of Refinancing?
The procedure for refinancing a mortgage is similar to that for obtaining one in the first place. To find the best deal, you usually start by shopping around and comparing interest rates and other terms with different mortgage lenders. Then, you compare the terms of that offer to the terms of your current loan.
If your credit has improved after you received your first loan, you might be able to get better terms on the new loan. Keep a close eye on the mortgage payments as you go through this process. Also, keep an eye out for prepayment penalties, which can cause issues if you pay off the loan early or remortgage again.
Refinancing Options
You can apply for three different types of refinance loans: rate-and-term, cash-out, and cash-in. Here’s what you need to know about each of them.
Rate-and-Term Refinance Loan
The goal with this type of loan is to change the interest rate, loan term, or both without changing the loan amount. If you want to save money on your monthly payment or switch your loan from an adjustable to a fixed rate, this is the best choice.
Cash-Out Refinance Loan
A cash-out refinance, as the name implies, entails cashing out a part of the home’s equity. As a result, the loan amount is increased, and the difference is usually equivalent to the amount cashed out. While a cash-out refinance may help homeowners get the money they need for specific purposes, it usually comes with a higher monthly payment and interest rate than a rate-and-term refinance.
Cash-In Refinance Loan
A cash-in refinance is much less common than a cash-out refinance. This occurs when a homeowner refinances their mortgage loan and contributes funds to lower their new loan balance.
If you’re behind on your mortgage, want to get rid of private mortgage insurance or apply for a lower interest rate, or maintain your mortgage amount below certain limits, a cash-in refinance may be worth consideration.
How to Qualify for a Refinance Loan?
The requirements for refinancing a mortgage are similar to those for obtaining a new mortgage. Lenders can take into account a number of considerations, including your: credit score and history, your current loan’s payment history, history of earnings and employment, the current value of the home’s equity, and other financial liabilities.
If you meet a lender’s requirements based on these criteria, you’ll be given an offer depending on the risk you pose. If you have a good credit history, a steady income, and a lot of equity in your home, you may be able to get a new loan with better terms.
If, on the other hand, your credit score has dropped since your first mortgage or you have more overall debt, you may have a more difficult time getting approved for better terms.
