How many times have you heard the call to refinance as if there was a fire?! “Lock in a Lower Rate!”, “Refinance Now and Save!” Everywhere you turn there’s a sign, billboard, radio or TV ad telling you the time is right to refinance. All you have to do is call to start saving!!!
But how do you know the time is right for your particular situation? At the very least, it’s worth taking some time to weigh your options. This is your home and the idea is to build wealth for your family and to rest easy at night knowing you’re on the right track.
What Is A Mortgage Refinance?
A mortgage refinance is the process of replacing your existing mortgage with a new one. You’re most likely to consider a mortgage refinance only if the new terms are more favorable or if you plan on using some of the equity in your home to consolidate other debts. In the end, you’ll either have a shorter time period to pay off your mortgage or you’ll be saving money every month by having lower overall payments.
Types of Mortgage Refinance
- Rate & Term Mortgage Refinance – This is a mortgage refinance that only pays off your current mortgage balance and does not give you cash at closing. You’ll most likely be considering this loan if you are lowering the interest rate enough to lower your monthly payment or you want to reduce the term from, say, 30 years to 15 years. The loan to value on this loan can typically go as high as 97% in most situations.
- Cash out Mortgage Refinance – This is a mortgage refinance where you are able to pull money from the equity in your home to have as cash or to consolidate other debts in to one low monthly payment. A cash out refinance is usually restricted to a max of 80% of the home value.
How Does Mortgage Refinance Work?
Just like when you initially purchased your home you have to apply for a mortgage refinance. When you’re ready, you can either call us directly or click here to begin filling out our secure mortgage refinance application online. Here are some key factors any lender will be looking for in order to consider approving you for a new mortgage refinance.
- Mortgage Payment History – It is extremely important that you have made the last 12 months mortgage payments on time. If your credit report shows that you have a late payment on your mortgage at any time over the last 12 months you will most likely be denied a mortgage refinance.
- Income – Every lender will want to make sure that the income you are currently making is enough to ensure your new mortgage will be paid on time. A good rule of thumb is take half of your gross monthly income and subtract all of your monthly minimum payments from it. If you still have money left over your income should be sufficient. As an example, let’s say you make $60,000 a year. That is $5000 gross monthly income. $5000/2 = $2500 If we subtract your mortgage/taxes/insurance/hoa of $1500 we are left with $1000. If you have a car payment of $500 and student loans for $150 and credit cards for $150 we are left with $200. This means your income should be sufficient. You always want to have some money left over after you subtract your monthly credit reporting bills.
- Credit Score – A good credit score can mean the difference in having a lower or higher interest rate. A lower credit score means there is more risk in you not making your payment and the investor is going to compensate for that risk by raising the interest rate. The difference in rate is usually not much but it can be enough certainly make a difference at the end of the year.
Should I take advantage of a Mortgage Refinance?
You should seriously consider taking advantage of a mortgage refinance if you’re saving enough money every month to make it worth while, or you are shortening the term of the mortgage so you will have your home paid off sooner. The monthly savings from a mortgage refinance could be used to pay down other debts or save for retirement. Keep in mind you can also use the monthly savings and apply it to your new mortgage to pay it off much sooner. The idea is to one day own your home and not have your home own you.
I recently helped a couple refinance to pay off nearly $25,000 in credit card debts. This saved them $800 a month that they were able to apply to their mortgage balance saving them over $107,000 in interest and nearly 14 years on their mortgage. Not all instances are on that level but even $200 a month in saving if put to the same mortgage would have saved them $43,000 and 6.5 years
However, you should absolutely avoid refinancing because you want to do something like take a vacation or buy a new care. You should never use the home equity you’ve earned to buy items that will depreciate faster than you’ll regain the same amount in equity.
Ready for a Mortgage Refinance?
As long as you’re planning on staying in your home long enough to recoup the cost of the mortgage refinance then it is worth it. That’s when the lower interest rate you want to take advantage of really starts to pay off! For more information on a mortgage refinance contact us today at 312-600-4513 or click here to fill out or secure online application.