Last fall, applications for mortgage refinance loans were at an 18-year low. This means that 22% fewer people were applying to refinance their home.
What does that mean exactly? It’s good! It means that fewer people are having to take out a second loan to pay for their current mortgage.
However, having to refinance your home doesn’t always mean something’s wrong. It’s pretty common, actually.
A lot of people opt for this when reworking their budget. How does refinancing a home work? Here’s everything you need to know.
How Does Refinancing a Home Work?
Refinancing a mortgage is when you take out a new loan to pay off your original mortgage loan.
While people might try refinancing a home for many reasons, we’ll get to those later. First, it’s important to understand how the process itself works.
Generally, it’s similar to how you took out your first mortgage loan. You’ll want to contact different mortgage companies in your area and ask about interest rates and repayment terms first.
Once you receive an offer you like, you can compare the terms of your new loan against the existing one you have out on your home.
If you have worked hard to improve your credit since you took out your first home loan, then you’ll want to make sure that reflects in the new loan. You should be able to receive a loan with better terms this time around.
Closing costs are what tend to catch most people off guard, so be aware of these fees when you’re shopping around for your loan.
Benefits and Drawbacks of Refinancing Your Home Loan
Homeowners tend to refinance their home in order to take advantage of lower market interest rates or to reduce their monthly payments. The main reasons tend to include:
- Lower Interest Rate: This is especially true if your credit score is better now than it was when you took out your first loan.
- Cash Out: If you have a lot of equity tied up in your home, you could be eligible to cash out a portion of it to pay for a down payment on another investment or to help pay for another large purchase.
- Changing Rate Type: If your first loan came with an adjustable rate, then you might want to look into getting a new one with a fixed rater. This will help avoid overpaying when the market fluctuates.
- Changing Loan Terms: Similar to changing your rate type, you can change the terms of your loan, too. You might want to shorten the repayment period or look for one with a lower interest rate.
If you can get a new loan that has a longer repayment term you’ll be able to save more money monthly to use for renovations or to invest in other financial opportunities.
People who have refinanced their home typically say that the best reason to do so was to secure a lower interest rate on their mortgage.
However, each of these reasons come with some drawbacks. They’re more trade offs, really.
Lengthening your loan terms, for example, will result in you having to pay more interest. Likewise, if you want to cash out on a portion of your home equity, you might have to pay a higher loan amount on the new mortgage loan.
Like any financial situation, there are always pros and cons to analyze, and finding the right mortgage broker can help you understand these better.
How Do You Qualify for a Refinance Loan?
Again, the process is very similar to the process for a new mortgage loan. The same goes for the requirements needed to qualify for the mortgage refinance.
Before granting you the loan, lenders will typically take a look at things such as:
- The equity you have in your home
- The payment history on your current home
- Credit score and credit history since you’ve had your current loan
- Income and employment history
- Your home’s current value
- Any other debt you have yet to pay off
According to these conditions, you’ll be offered loan terms. Usually, the less risk you pose to the lender, the better the loan terms will be.
Before applying, it’s important to know that a request for a refinance home loan can affect your credit score.
This is because it counts as a hard inquiry on your credit report. This can lower your credit score by a few points, especially if you make more than a few inquiries.
As well, you’ll want to consider the fact that when you close out your old mortgage loan, your length of credit history might take a hit as well. Be sure to stay on top of this to avoid coming out of the process with worse credit than you went into it with.
Qualifying for a mortgage loan isn’t that hard to do, and it’s even easier if you employ the expertise of a broker. They’ll help you get the best loan terms and encourage you to stay on top of your current loan payments to avoid falling behind.
Is Refinancing Right for You?
The bottom line is that refinancing your mortgage is a process that can benefit you greatly. It’s also a process that you’ll want to research before you make a decision.
Refinancing can be a great move if it allows you to reduce your monthly mortgage payment or shorten the terms of your loan, among other benefits.
How does refinancing a home work specifically for you? Contact us today so we can walk you through the process as it relates to you personally.
We’ll help you take a careful look at your financial situation to find out what kind of refinancing is right for you.
Not quite sure why you need the help of a broker anyway? Simply put, we have options and our options can help you expand your options when it comes to refinancing your home.