Refinance Mortgage

Reasons to Refinance a Mortgage

There are several reasons homeowners choose to refinance their mortgage loans. Here are some of the top ones to think about:

• Lower interest rate and payment: If your credit has improved or market rates have dropped since you got your first loan, you may be able to save money on interest with a lower rate and monthly payment.
• Cash out: If you have significant equity in your home, you may be able to cash out a portion of it with a refinance to pay bills, finance a large purchase, or buy out an ex-spouse in a divorce.
• Change rate type: If your original mortgage has an adjustable rate, moving to a loan with a fixed rate can help you avoid market fluctuations.
• Change loan term: You can typically qualify for a lower interest rate if you shorten your loan term from, say, 30 years to 20 or 15 years. Doing so can also save you money on interest over the life of the loan. If you lengthen your loan term, you can potentially lower your monthly payment.

As you consider a refinance, it's also important to consider several factors on whether or not a refinance makes sense:

• Length of time you plan on staying in your home
• Cashing out a portion of your equity may increase your monthly payment
• Length of time to recoup closing costs if the purpose of the refinance is to save money over time
• Use of proceeds if you plan to cash out equity

Different Types of Refinancing

There are two main types of refinance loans you can apply for: rate-and-term and cash-out. Here's what to know about each one.

Rate-and-Term Refinance Loan

With this type of loan, the goal is to change the interest rate, loan term or both without making any changes to the amount of the loan. This option is best if you're trying to save money on your monthly payment or switch your loan from an adjustable rate mortgage to a fixed rate mortgage.

Cash-Out Refinance Loan

As the name suggests, a cash-out refinance involves cashing out a portion of the home's equity. Doing so results in a higher loan amount, with the difference typically equal to the amount of funds/equity cashed out.

While a cash-out refinance can help homeowners get the cash they need for certain activities, it mayresults in a higher monthly payment.  Careful consideration and consultation should be discussed prior to chosing a cash out mortgage..

How Do I Qualify for a Refinance Loan?

The qualifications for refinancing a mortgage are similar to the criteria for a new mortgage loan. Lenders will consider several factors, including your:

• Credit history and score
• Payment history on your existing loan
• Income and employment history
• Equity in the home
• Home's current value
• Other debt obligations

If you meet a lender's standards based on these criteria, you'll receive an offer according to the risk you pose to the lender. If, for example, you have a spotless credit history, a solid income and a lot of equity in the home, you may get approved for better terms on the new loan.