Effective Mortgage Refinancing
The opportunity to get a cheaper interest rate and a lower monthly mortgage payment prompts many owners to refinance their existing mortgage. But for an effective refinance, it's wise to increase your odds of an approval and understand fully how refinances work.
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Know the Equity Requirements
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Different mortgage loans have different requirements regarding the equity in your property. For example, refinancing to a conventional mortgage will require a loan-to-value ratio of 80 percent, which is essentially 20 percent equity in the home. If choosing another type of refinance, such as an FHA mortgage loan, you only need 5 percent equity in the home. Mortgage lenders will assign a home appraiser to visit your property and determine the house's value before completing the mortgage refinance.
Good Credit Score
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A good credit rating refers to a score in the high 600s, and qualifying for a mortgage refinance will likely mean meeting this requirement. A score of at least 680 justifies an approval, says Bankrate.com. But if you're looking for the cheapest rate possible on the mortgage refinance, aim higher and take steps to acquire a score 740 or higher. These steps including paying your bills on time and reducing your consumer debt to help raise your score. According to MyFICO.com, payment history and outstanding debts together account for 65 percent of your credit score.
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Know Your Options
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Refinancing a mortgage loan opens the door to different home loan options, and knowing your options helps you choose the best home loan for your situation. Do you want predictable payments and an interest rate that stays the same? If so, talk to your lender about a fixed-rate mortgage. Do you need cash to pay off high interest debt? In this case, consider a cash-out refinance and borrow against your equity. Are you looking for the lowest monthly payment possible or a means to pay off the mortgage debt sooner? Refinancing a mortgage gives you the option of extending the mortgage for an additional 30 years or selecting a shorter term such as 15 or 20 years.
Qualifying
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Prepare to provide evidence of steady income and employment when refinancing your mortgage. Meeting with a mortgage lender and having the necessary documentations on hand helps facilitate the refinance process. Lenders will not approve your application without first checking your income to see if you can afford the payment. Being unemployed or a significant decrease in your income can hinder refinancing. Make copies of tax returns, banking statements and IRS W-2 forms.
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