Refinancing your home loan means replacing your existing mortgage loan with a new one — one that has a different interest rate, a lower monthly payment, a shorter term limit, or other changes. You will pay off your existing mortgage loan with the new, refinanced home loan.
The process of refinancing your mortgage might feel familiar, as it’s similar to what you went through when taking out your first mortgage. As with your first mortgage, you will need to compare interest rates and shop around with lenders. Once you find the best rates, you can compare them to your current mortgage interest rate and see if refinancing is in line with your financial and life goals.
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Why should you refinance your mortgage loan?
Why should you consider refinancing your home loan? It depends on your current financial situation and overall goals, but mortgage refinancing could help you save money in the long run and obtain more favorable loan terms. Common reasons to refinance a mortgage loan include the following:
- To obtain a lower interest rate
- To avoid mortgage insurance
- To switch from an adjustable-rate mortgage to a fixed-rate mortgage
- To shorten the terms of your mortgage loan, helping you pay less interest over time
- To access home equity to consolidate debt or access funds
Before you jump in to refinancing your home loan, you’ll want to take the following steps to ensure you’re doing it the right way.
Step 1: Identify your goals for refinancing
When you get started, ask yourself why you want to refinance your home loan in the first place. Do you want to save on monthly payments, avoid mortgage insurance, or shorten the life of your loan? It’s also important to consider how long you expect to stay in your home, how much equity your home holds, and what your current financial situation is. Your main goal for refinancing will help you prioritize your needs while you shop for a new mortgage loan.
Step 2: Evaluate your credit score and credit history
If your credit score is significantly higher now than it was when you purchased your home, you could qualify for lower interest rates or better terms. If your credit score is lower than when you started, it may make sense to focus on rebuilding your credit before you refinance. Otherwise, you could end up with worse loan terms or rates. Credit scores in the mid-700s and higher will help you get a low interest rate.
Additionally, you’ll want to avoid opening any new lines of credit such as credit cards or auto loans while you’re shopping around for better loan terms.
Step 3: Determine your home’s equity
Your home equity is the difference between how much you own on your mortgage loan and the current value of your home. You can calculate your home’s equity by knowing how much you currently owe on your mortgage loan, and compare that with your home’s market value. For example, if you currently owe $150,000 on your mortgage loan but you find out your home is valued at $275,000, you have $125,000 in home equity. If you have more than 20% equity in your home, it could make it easier to refinance your loan, as mortgage lenders or banks will view you as less of a risk.
Step 4: Identify your ideal interest rate
Mortgage interest rates change all the time — sometimes daily. Before you refinance, be sure you have a thorough understanding of current rate trends, and the rate you need in order to refinance your mortgage loan. Experts recommend that you should only consider refinancing if your new interest rate is one to two percentage points lower than your current rate. You can shop around for quotes from lenders to find your ideal rate.
However, just because you find a low rate doesn’t mean you’ll avoid other fees. Be wary of high lending fees associated with escrow, appraisals, property taxes, and insurance.
Step 5: Find a fair mortgage loan company
Whether you decide to refinance your mortgage depends on a variety of factors. But once you’ve made your decision, the next step is to go with the right mortgage loan team. Loan Remedy has simplified the mortgage refinancing process so you can find the terms you want without the hassle. Contact Loan Remedy today to find out how it works.