Understanding Mortgage Refinancing
Understanding the process of refinancing your mortgage loan can help you acquire an easy approval. Mortgage refinances often increase as mortgage interest rates drop to historic lows. This gives homeowners the opportunity to lower their existing rate and monthly note. Because refinances aren't for everyone, understand how these mortgages work before submitting an application.
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Definition
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Mortgage refinancing is the process of replacing an existing mortgage loan with a completely new mortgage loan. The new mortgage loan pays off the old, and involves new terms and interest rates. Countless reasons justify a refinance such as replacing a risky or bad home loan with one that features a better rate and terms. Refinancing also lets owners borrower cash against their equity to consolidate debt, pay for college or make home renovations.
Equity and Refinancing
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Home appraisals are an aspect of mortgage refinances to assess how much equity is in a property. The amount of equity in your home determines the type of mortgage refinancing you can acquire. Conventional mortgage refinances require at least 20 percent equity. If refinancing to an FHA mortgage loan, you only need 3 percent equity. If you're "upside down" on your mortgage loan -- you owe more than the property's worth -- you may qualify for a government program known as Making Home Affordable that allows refinancing up to 125 percent of a home's value.
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Qualifying
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As with any other type of mortgage loan, getting a mortgage refinance involves completing a home loan application and having a lender determine whether you're eligible for a mortgage. Eligibility is based on your current income and credit score. Thus, the new mortgage payment on the home must be no more than 28 percent of your gross monthly income, and you will need a minimum credit score of 680.
Warnings
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The costs of refinancing can greatly outweigh the benefits. Closing fees on a refinance loan are between 3 and 6 percent of the mortgage balance. Every owner who refinances a mortgage must pay this fee to the lender on the day of closing. Because it can take years to recoup the costs of refinancing a mortgage, you should consider how long you plan to live in the home. For a refinance to make sense, property owners need to stay in the home long enough to break even. For example, paying $7,000 in closing costs to save $300 a month on a mortgage payment will take approximately two years to break even.
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