Refinancing Your Mortgage

Consider Refinancing Your Mortgage

Refinancing your mortgage can save you money and can be less daunting if you know what to expect. This article will walk you through the basics of refinancing a mortgage.

What Does Refinancing a Mortgage Mean?

Refinancing your mortgage essentially means getting a new loan to replace an earlier one. The new loan is used to repay the earlier loan. This may seem redundant, but there are several good reasons why homeowners consider refinancing their mortgages.

Reasons for Refinancing

There are two main reasons why homeowners refinance their mortgages:

  • Lower Interest Rates

A lower interest rate is beneficial for any homeowner seeking to refinance their mortgage. A lower rate will in turn lower the total amount owed to the bank so that you will save money. The amount saved can be significant, depending on the amount owed and the rate at which the interest rate falls.

  • Shorter Repayment Periods

The idea of being done with your mortgage loan repayments sooner than planned is also a good reason for refinancing. Many homeowners consider it a relief, especially if they are planning to put their money elsewhere.

Refinancing your mortgage with the goal of shortening the repayment period is only convenient in two scenarios; when the interest rate drops, or when your financial situation improves. This is important because shortening the repayment period could result in higher monthly payments, so you should be prepared to see the new arrangement through.

The Cash-Out Option

You can also get some cash out of the mortgage refinance. The amount you stand to get is the difference between the earlier mortgage loan and the amount offered in the new mortgage refinance loan. The exact amount depends on your home’s equity value.

The cash-out option is beneficial if you are looking for ready cash to invest elsewhere. Unfortunately, some homeowners may refinance their mortgages just for the cash because it sounds appealing. In some cases, this puts them in a worse position than before.

Factors to Consider Before Refinancing Your Mortgage

Refinancing a mortgage should be a well-thought out decision and should not be taken lightly. The benefits you stand to gain depend on a variety of factors on your end. Here are some of the most important factors you should consider before making the decision:

  • Mortgage Rates: Fixed Vs. Adjustable

The interest rates negotiated when taking out a mortgage can be either fixed or adjustable. You can change the rate terms when refinancing the mortgage.

A fixed interest rate means that your monthly payments will be fixed. An adjustable-rate mortgage, on the other hand, means that your monthly payments will fluctuate as the overall interest rates change. The former offers certainty and could be ideal when you are set on paying over the life of the loan. The latter is more of a gamble, but it is ideal when the current interest rates are low and projected to stay low for the foreseeable future.

A switch to an adjustable-rate mortgage (ARM) could be ideal if the interest rates are low. An ARM agreement is most suitable when you are also aiming for a shorter repayment period as it will lower your monthly payments for the foreseeable future.

  • Your Home’s Equity

You will not be able to qualify for a mortgage refinance if your home’s equity does not meet the mark. Ideally, the home’s equity should be significantly higher than the amount you are borrowing. It would be best if you had at least 20% equity in your home for a strong bargaining position.

The value of your home’s equity is especially important if you are considering cashing out on the mortgage refinance loan. While most banks and conventional lenders will not consider your application if your home equity is below par, some government programs can consider you.

  • Your Credit Score

Lenders have raised their standards of loan approvals since the economic collapse of 2008, which was mostly blamed on poor lending standards. As such, you need to have a good credit score if you want favorable terms to refinance your mortgage.

In general, a higher credit score is preferable for the lowest interest rates. You can still qualify for a mortgage refinance with a low credit score  , but the interest rates will be higher than ideal.

  • Your Debt-to-Income Ratio

The standard maximum monthly rate for housing payments has been set at 28% of the debtor’s income. Lenders consider this just as important as the credit score denominator.

Your income should be enough to finance not only your mortgage refinance loan, but also other debts and loans under your name. The overall debt-to-income ratio, on the other hand, should be 36% or less. A good personal finance portfolio, which may include a stable job history and substantial savings, will also afford you a stronger bargaining position.

It is advisable to pay off some of your smaller debts before applying for mortgage refinancing. You can also work out a deal with willing lenders if your debt-to-income ratio is not favorable, but you will have to settle for high-interest rates and other unfavorable terms of repayment.

  • Cost of Refinancing

The ultimate goal of refinancing, as mentioned, is saving money. This means that the amount you stand to save should exceed the cost of refinancing.

Mortgage refinancing costs an average of 3-6% of the total loan. The exact cost depends on a variety of factors, including the prevailing interest rates and your home’s equity value. Ideally, market conditions should be favorable. You can exploit other ways of lowering the cost, including working with no-cost lenders.

Let HFCU Help

Are you looking to refinance your mortgage? Heritage Financial is your best option. We have all the resources you would need to refinance your mortgage. Get in touch with someone from our Mortgage Team by visiting our webpage: to find out more about how we can help.