When you buy a home, you take out a mortgage — a loan used to buy a house. Refinancing is the process of taking out a new mortgage to replace the first one. This is done to obtain more favorable terms — such as a lower interest rate or a shorter loan term.
You could refinance with the lender that funded your initial home loan, or you could opt to go with a new lender. Comparing lenders can help you get the best rates on a home refinance loan.
Rate-and-term or cash-out refinance
15-year or 30-year term
Fixed or adjustable
Home refinancing typically goes through the following steps.
Be aware that federal law gives you the “right of rescission” when you refinance a mortgage. This means that, up to three days after you sign the closing documents, you can provide your lender written notice to cancel the refinance if you change your mind about it.
Before you refinance, you need to know how much your home is worth and how much you can borrow. Read the following steps to get ready.
If you have little or no equity in your home — or if your home is underwater, meaning you owe more on it than what it is worth — you may have difficulty refinancing with a conventional loan. Some government programs are designed to help homeowners with low equity, such as HARP.
The better your credit is, the more likely you are to qualify for a refinance. You also may be able to get a better interest rate. Check your credit score before you apply for a home refinance.
Do some research and find a lender that can help with your specific refinancing needs.
Getting your home appraised at a higher value can be beneficial, because it decreases the loan-to-value ratio (LTV) of your loan.
Although refinancing often can save you money, that isn’t always the case. Sometimes, you’ll find that the reduced interest rate doesn’t make up for the cost and hassle of refinancing your mortgage.
If your score is low, take time to improve your score before you apply for a home refinance. Obtain copies of your credit report from the three major credit reporting bureaus, and report any errors on them. If errors are disputed successfully, your credit score may get a boost.
Refinancing your home makes the most sense under certain circumstances.
The federal Home Affordable Refinance Program (HARP) caters to borrowers with a loan-to-value ratio (LTV) equal to or greater than 80 percent, and with limited delinquencies over the 12 months before seeking refinancing. It can help homeowners reduce their monthly payments.
HARP is a voluntary program, meaning lenders don’t have to participate in it. There are, however, basic qualifications a homeowner must meet in order to be considered for a HARP refinance.
How are home refinance rates calculated? Several factors that determine the rates you will be offered on a refinance.
Your credit has an impact on what interest rate you will be offered. Check your credit score and obtain copies of your credit report. See if there’s anything you can do to improve your score, and report any errors to the three major credit reporting bureaus.
The more equity you have in your house, the greater the likelihood you will get a better rate on your new loan. If you have some extra cash before you refinance, you may consider paying down part of your mortgage before applying for a refinance to see if it can help you secure a better interest rate.
High debt can negatively impact your debt-to-income ratio, one of the main factors used to determine your creditworthiness. Paying off debts can improve your credit and help you secure a more favorable interest rate.
Refinancing your home loan can be done in various ways, which meet your needs and priorities.
Although the ultimate goal of refinancing is usually to lower the interest rate or to reduce your monthly mortgage payment, refinancing comes with a wealth of costs homeowners should consider carefully.