Refinance Home Loan
Being able to refinance home Loan is not as simple and easy as calling your bank and letting them know that you wish to do so at the soonest time possible.
This can be a bit complex since there are various factors that need to be considered. But, with some research, it wouldn’t be too hard to refinance home loan.
Remember that there might be more effort at this point as compared to when you purchased your home for the first time. That is why before you proceed with your plans for refinancing, there are a few things you should know.
When Should You Refinance Your Home Loan?
Every time mortgage rates falls just like what happened during the first quarter of 2020, most homeowners opt to refinance their home loan. While there is a dramatic increase in the refinance activity last year, it doesn’t mean that this is a always a wise move. The trick here is to know when you should refinance home loan.
In general, if you can save money through refinancing, you can build equity and let you quickly pay off your home loan, this is a good decision. With such low rates, even people with fairly new home loans can take advantage of refinancing.
So, when is it a good idea for you to refinance home loan?
If you could remove one-half up to three-quarters of the percentage point off your home loan rate through refinancing, you might want to consider it. Just make sure that the cumulative savings on the monthly payments will be enough for offsetting the refinancing costs. It might not be the case if you have plans to move in the next one to two years.
Market factors determine the home loan interest rates such as the yields on the long term Treasury bonds. Of course, those who have the best credit can get the best terms and rates.
This means that the question on when you should refinance home loan doesn’t only have something to do with interest rates as it is also about having good enough credit for you to be qualified for the suitable refinance home loan.
Your personal financial goals, the length of time you are planning to stay in the house, the amount of equity you got in the house, and your financial condition as a whole are all critical considerations as far as refinancing is concerned. Make sure you ask yourself first the right questions before you get started.
Is It a Good Idea to Refinance a Home Loan?
It will be a good idea to refinance home loan if this means that you will lock in a lower interest rate at fixed rate or reduce the length of your mortgage term. The savings that you can make when you do so can help you deal with the important stuff such as saving up for your retirement and paying down any debt.
It is also a good idea to refinance home loan if this will help you take better control of your bills every month. You will have more confidence as you go forward if you got more money you can put toward to become completely free from debt. Plus, you can just imagine how great it would be if you can own the house right away.
However, there are also instances when it is not a good idea to refinance home loan. Refinancing and getting into more bet wouldn’t be a wise option if you want to get a new car, you have plans to pay off your credit card bills, or you wish to renovate your kitchen. Wiping out the equity of your house to purchase new items you don’t really need can put your house at risk, particularly if you end up losing your job or your face financial difficulties.
How Does a Refinance Home Loan Work?
To refinance home loan, you need to look for a loan and apply for it like what you did when you originally applied for your first mortgage. You can get in touch with the lender directly or work with a broker to check if you will be approved and qualified for refinancing.
To check if you will be qualified, you need to prepare some paperwork to help with your case. Many lenders check different things but in general, they expect you to meet the main requirements below:
- Maintained original mortgage – All lenders require proof that you were able to maintain and pay your original mortgage for a minimum of 12 months before they can consider refinancing your home loan.
- Income – You need to prove that you got a regular income. Lenders are also going to check your debt to income ratio. They will basically want to ensure that you will be able to pay off your bills according to the income you earn and that your existing debt payments will not get in the way of your monthly refinanced home loan payments.
- Equity – You have to show that you have a minimum of 10% to 20% equity in your house.
- Credit status – For lenders who check your credit score, you may get higher interest rates if you have lower credit score.
How Much Does It Cost to Refinance a Home Loan?
Depending on the specific lender, the location of your property, and the specific amount you will borrow, the closing costs to refinance home loan could range from 3% up to 6% of the amount of the loan. This means that if the amount of your loan was $100,000, you will pay fees worth at least $3,000.
The costs to refinance home loan don’t include mortgage insurance, homeowner’s insurance, and property taxes since these were made when you initially purchased your house. Take note that you will only revise your original mortgage here and you won’t necessarily start from scratch.
The closing costs to refinance home loan include:
- Title search, new home appraisal, and refinance application
- Lender’s attorney review fee
- Home inspection fee
- Points fee
- Origination fee
Even though you might be able to avoid all the closing costs, the mortgage points fees can be avoided if you ask for a zero quote or par quote. It means that points will not be included in the closing cost estimates. The moment you have made up your closing costs, you will be able to enjoy the perks of lower interest rates until the end of the mortgage term or until you decide selling your home.
Make sure you know all the things involved to refinance home loan to take advantage of the process to the fullest!