Refinancing is one effective way if you want to pay off your mortgage early. However, like every method, it has its perks and drawbacks. If you have decided to refinance your mortgage, you should know what you are signing up for.
Refinancing gives the homeowners an opportunity to restructure their finances. But, you have to consider some factors to figure out whether or not a mortgage refinance right for you. Peruse these few considerations before applying for a home refinance:
Your home equity is the first qualification that your lender will consider before approving the refinance. Getting an approval won’t be easy if the current market value of your home is less than what you owe to the mortgage lender.
Some government programs can help you if you have little or no equity. However, you should visit a lender and discuss your particular requirements and needs to know if you qualify for any such program.
Most lenders want a credit score of 740 or more to approve the homeowners the best mortgage interest rates. So, it’s not surprising if you don’t qualify for the lowest interest rates even after having a good credit score. Once in a year, you can get a free copy of your credit report from each of three major credit reporting agencies. So, get your copy and figure out if the score is enough to qualify for the mortgage interest rate you are looking for.
The Cost of Refinancing
If you apply for a refinance, you have to pay something between 2% and 5% of your loan amount as the closing costs, and you have to pay it upfront. So, if you’re refinancing a $300,000 loan, you are likely to pay an amount between $6,000 and $15,000 in closing costs.
You can opt for a no closing cost refinance, but that will demand a slightly higher interest rate. So, you need to calculate which option will be financially beneficial.
The Option for a Cash-Out Refinance
If your equity is good, you can apply for a cash-out refinance that will allow you to get a new loan for more than the amount you owe on your current mortgage. It’s a good option if you can spend the money sensibly. The interest rates for cash-out refinance are slightly higher than other refinance options, but it’ll be worth it if you spend the additional money to increase your property’s value.
Recovery Period of Refinancing Costs
You should consider the period because a faster recovery time is financially helpful. Your refinance costs and the revised mortgage interest rate will depend on the term, amount, and rate of your previous loan. It will be a favorable refinance scenario if you can repay the closing costs between one and two years.
Mortgage refinancing is a complex process and demands patience on the part of the homeowners. If you don’t know much about it, go to a reputable lender to figure out if you need refinancing and which option is right for you.