Refinancing your mortgage can be a good move or a mistake, depending on why you're doing it.
Mortgage refinance means that you're replacing your current home loan with a new one. The new loan pays off the old one, so you'll end up with just one mortgage.
The process of refinancing is similar to applying for a mortgage to buy a house—minus shopping and making an offer for a property. It includes applying for the new loan, underwriting, home appraisal, and closing.
There are many reasons why a homeowner would want to refinance their mortgage. But since the process can be tedious, it's important to have careful consideration before refinancing.
When is Refinancing a Good Idea?
- When it can lower your monthly payment. The most common reason for refinancing is to lower the monthly payment. The rule of thumb is to refinance if it will reduce your repayments by at least 1%. However, there is no 'right amount' when it comes to refinancing. It will depend on your goals and capability to pay upfront. Moreover, if you have a good to excellent credit score, your lender might give you a better rate.
- To shorten your mortgage term. The refinancing goal of some homeowners is not to lower their monthly payments. Instead, they opt to shorten the mortgage term. Although this might lead to higher monthly payments, shortening the term can help increase your equity faster.
- To change your loan type. If you currently have an adjustable-rate mortgage but want to change to a fixed-rate loan, refinancing might be what you need. Others who initially chose an FHA loan might want to convert to a Conventional loan to remove the mortgage insurance premium. However, you need to meet certain requirements, such as having a credit score of at least 620 and a 20% home equity.
- When you need to access your home's equity. There are a lot of reasons why a homeowner would want to access their home equity. A home equity loan can be used to consolidate debt, pay for home improvements, or finance your children's college education.
When is Refinancing a Bad Idea?
- If you're using it to invest in stocks. Cashing out your home equity to invest in stocks is probably not a good choice. This is because the stock market is very volatile. Prices can change suddenly, and it's tough to predict these changes.
- You don't have a plan. Home equity is a homeowner's financial interest in a property. That means it's all yours. And if you want to cash it out and use it to go on vacation, that's up to you. However, imagine doing all the hard work so that you could qualify for a refinance and end up losing all that savings to a frivolous lifestyle. So always have a plan and never refinance just because everybody else is doing it.
- If you're switching to a longer-term mortgage. When you refinance, your mortgage term resets. For example, you only have 10 years left in your current mortgage, and then you refinance into a 30-year mortgage. You will be making monthly payments for another 30 years. Additionally, you'll be paying more for the interest.
- If you're moving out soon. It usually takes 30 months to break-even on the refinance cost. Everything after that 30 months is a savings. However, if you're moving out before you regain the refinance cost, you might end up losing money.
Qualifications for Refinancing a Mortgage
The qualifications needed to refinance a mortgage are similar to the requirements needed for a new mortgage. Factors that you need to consider include:
- Credit score
- Equity in the current home
- Other debts
- Ability to pay the closing costs
- Proof of income such as employment history or pay stubs
- Home's current value
When Can You Refinance Your Mortgage?
There's no specific time as to how soon you can refinance your mortgage. However, it can depend on the type of mortgage you have and your lender.
For a conventional loan, you might have to wait for six months after purchasing your home before applying for a refinance. With an FHA loan, you might be required to pay monthly payments and occupy your home for at least 12 months. If you intend to cash out your home equity, you need to build enough equity first.
Ebenzer Mortgage Solutions is here for you
If you have more questions about refinancing or need help applying for a mortgage to buy a home, Ebenezer Mortgage Solutions will be happy to help you. Call our mortgage broker today at (813) 284 - 4027.