July 6th, 2020 10:14 AM by Jackie A. Graves, President
Owning a home has many benefits, but it can be expensive. If you
currently own a home and you want to lower your monthly payment or reduce the
overall cost of your home loan, you may consider choosing to refinance your mortgage.
you refinance your home loan, you replace your current mortgage with a new one.
The new loan typically offers better terms (like a lower monthly payment,
longer repayment terms, or lower interest rate).
As of June 25, the average interest rate on
a 30-year fixed-rate mortgage is 3.13 percent and 2.59 percent on a 15-year
fixed-rate mortgage. Mortgage interest rates are
at or near historic lows in many areas as a result of the impact of COVID-19.
Given mortgage rates have hit record lows in recent months, now could be an
opportune time to refinance.
choose a mortgage refinance, it’s essential that you understand your options
and which type of refinancing would provide the most benefit for your
you’re refinancing your loan, decide what is most important to you:
Reducing your monthly payment
Saving money over the life of your loan
you may be able to save on both your monthly payment and the total interest
over the life of your loan, you may get maximum impact by focusing on one.
refinancing, you have two basic options:
Refinancing your rate and terms
type of refinancing replaces your current loan with a new one that has a lower
interest rate and/or loan term (like the length of your repayment).
If you have a credit score of
at least 700 and at least 40 percent equity in your home, you could qualify for
exceptionally low-interest rates on your mortgage. Most lenders won’t even
consider a refinance if you don’t have at least 20 percent in equity.
You might consider a refinance if your credit score isn’t quite
high enough but you have at least 20 percent equity, as you could refinance for a lower monthly
payment without a private mortgage insurance fee.
Another option is to refinance into a loan with different
repayment terms. For example, if you have 15 years left on a 30-year loan, you
could refinance into another 30-year
mortgage. Your monthly cost would drop, but you’d pay more over time
since your payments (and interest rate charges) stretch over more time.
you could refinance a longer-term loan into a shorter-term mortgage (a 30-year
into a 15- or 10-year fixed rate). Refinancing your loan to shorter repayment
terms could increase your monthly payment, but you’d likely qualify for lower
interest rates, and your total loan cost would be less since you pay interest
fees for less time.
cash-out refinance lets you access the equity you have in your home. You can
lower your interest rate as well. When you do a cash-out refinance, the bank
issues you a check for the amount you borrowed against your equity.
For a cash-out refinance,
many lenders like to see an LTV (loan-to-value) ratio of at least 80 percent,
but some lenders will allow a cash-out refinance if you have less equity. This
type of refinancing acts like a loan (the loan balance is added back onto the
amount you owe on your home), so you will have to pay closing costs and other
While you can use the cash for any purpose, you could receive some
tax benefits if you use the money for home improvement projects. You may
consider this type of home refinancing if you need access to emergency funds at
a lower interest rate, or you want to consolidate other debt at
a lower interest rate.
to know before you refinance your mortgage
While interest rates are lower than
ever, lenders are more strict about whom they approve. Make sure you
work on raising your credit score (lower
consumer debt and make all your payments on time), before applying.
If you want to refinance your loan, you should be current with
your monthly payments; however, you may qualify for special refinancing even if
your mortgage is in forbearance. Talk to
your lender as soon as possible if you think you could be eligible.
math. Take note of fees and other costs associated
with your refinance. Take a few minutes to look over the charges and decide if
a refinance will save you money and if the savings are worth the effort.
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