When Is The Right Time to Refinance Your Mortgage?
Buying a home is one of the most important decisions that people make during their lifetime. However, the process makes for an expensive investment, making it necessary to ensure proper financial planning before making the purchase. With property prices going up by the day, a good number of people turn to mortgages to help them acquire the home of their dreams.
While taking out a mortgage is a great way to start the homeownership journey and pay for the property over time, there comes a time that homeowners may choose to refinance their mortgage. This step is always accompanied by significant financial implications. This is why any mortgagor should ensure that refinancing is done for the right reasons and at the right time. Here are a few things to know to help you make an informed decision when the right time to refinance your mortgage comes.
Mortgage and mortgage refinancing
A mortgage is a loan that is taken to buy a house, with the money being paid back over time along with a specified interest rate. One of the features that differentiate a mortgage from a simple loan is that the home to be purchased is used as collateral. This means that the lender will have the right to take the house in the event that the borrower falls behind on their payments.
This also means that the borrower will not fully own the property until such a time that they have made the last payment. Since the property is used as collateral, interest rates are usually moderated. However, rate shopping will still help borrowers to identify the right lender and go for the most affordable mortgage.
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More and more people are refinancing their homes in order to solve their financial problems. Simply put, refinancing a mortgage is repaying off an existing loan and replacing it with a new one. This is mostly done in cases where the loan is either too expensive or too risky to handle. The details of the new mortgage loan are based on mutual agreement by both the lender and the borrower and can be customized to meet the needs of the borrower. In order to benefit from the exercise, it is important to know the right time to refinance your mortgage.
How to increase your chances of being approved for a Refinance
Once a borrower has submitted their application, it can be very frustrating if it gets rejected. By this time, most homebuyers will have made numerous plans and will be excited at the prospect of owning a home. When it is finally the right time to refinance your mortgage, you will want to do everything to ensure that your loan is approved. Here are a few steps you can take to help increase your chances of being approved.
Improve your credit:
Once borrowers have checked their credit score, they should take time to establish whether the credit report has any errors or inconsistencies. Any errors and inconsistencies should be reported to the credit reporting agency. Borrowers should also pay their bills and outstanding debts on time if they are to improve their credit score. As you know, having a better credit score saves a ton on the interest you pay. Getting a mortgage with good credit is always the best route.
Increase your income:
Increasing income is one of the easiest ways to ensure you will afford the mortgage loan you intend to borrow. Borrowers who have been at their jobs for a while can consider requesting a raise. Some of the other options include obtaining a part-time job to supplement the current earnings or to start freelancing.
Use a cosigner:
Using a cosigner can help boost the creditworthiness of the borrower, effectively increasing their chances of getting approved. It is important to choose a cosigner with good credit and sufficient income. Borrowers should also evaluate whether they will be in a position to make all the payments in time.
Put up collateral:
In case lenders think that there are high chances a borrower will default on the loan, they are less likely to offer the mortgage. However, putting up collateral will provide a guarantee that the borrower will repay the loan. Some of the tangible assets that can be used include vehicles, land, stock, and bonds.
Even as borrowers work out various ways to increase the chances of being approved, they should always be mindful of how daily mortgage rates will impact them. This will help them to determine the best time to apply for the loans.
When to refinance your mortgage
Knowing the right time to refinance your mortgage will go a long way in helping you to make other decisions. Here are some of the reasons why people choose mortgage refinance.
To secure a lower interest rate:
This is one of the most common reasons why people choose to refinance their mortgage. By replacing a high-interest mortgage with a low interest one, borrowers are able to save a significant amount of money. This decision will be influenced greatly by the prevailing daily mortgage rates.
To shorten or increase the loan term:
Negotiating a new loan term will have a direct impact on both interest and monthly payments. While a shorter loan term will reduce interest and increase monthly payments, a longer term will have the opposite effect.
To lower the monthly payment:
In case borrowers experience a cash flow crisis, they may consider refinancing their mortgage so as to lower the monthly payments. This helps them to repay the loan without straining and avoid the possibility of the lender selling their home due to defaulting.
To tap equity or consolidate debt:
Although this can be a slippery slope to never-ending debt, it is still a common reason why people refinance their mortgage. It is possible to access the equity in your home to cover major expenses such as home remodeling or college education. Some homeowners refinance their mortgage to consolidate other debts, making it easier to pay them off.
To switch your mortgage type:
There are different types of mortgages that borrowers can apply for. In case a borrower finds a mortgage type that meets their needs more effectively or their financial situation changes, they can refinance their mortgage to take advantage of the new opportunities.
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There are many more reasons why homeowners choose to refinance their mortgages. Before taking this step, it is important to ensure that the reason for doing so makes economic sense. This will help borrowers to avoid sinking deeper into debt and to protect their investment.
Bad reasons to refinance your mortgage
Just like there are good reasons to refinance a mortgage, there are also bad reasons for making this move. While it may be the right time to refinance your mortgage, a borrower may end up in financial trouble if they do it for the wrong reasons.
- To take advantage of no-cost finance: generally, a no-cost mortgage loan does not exist. While the prospect may be exciting, borrowers will still end up paying for closing costs and the applicable fees. If these are wrapped into the loan, the size of the principal will increase.
- To take cash out: there are times when borrowers will experience cash flow issues, making it necessary to cash out. However, the purpose to which this money will be put will determine whether taking cash out was a wise decision. Considering that the home is used as collateral when taking out a mortgage, it is important to take the associated financial obligations seriously.
- To save money for a new home: some people will choose to go for low monthly payments in order to save money for a new home. While there is no problem with making such a decision, borrowers should calculate how much a refinance will cost and how much it will save them every month.
Types of mortgages
Before mortgage loan shopping, it would be important to familiarize yourself with the different forms of mortgages. This will help you ask the right questions to potential lenders and make the most appropriate decision as you do mortgage loan shopping.
This type of mortgage keeps the same interest rate over the term of the loan. This means that the monthly mortgage payments that borrowers make will stay the same throughout the life of the loan. Some of the adjustments to the payments may be due to changes in taxes or insurance.
Adjustable rate mortgages have fluctuating interest rates, going up and down depending on market conditions. In some cases, these mortgages start off with the borrower committing to a lower initial interest rate for a specified period of time before allowing market forces to take effect.
A Balloon mortgage is not very common. For a given period of time, the borrower pays very little. At the end of the period set out by the terms of the loan, the full balance becomes due.
Under this type of mortgage, borrowers will pay only interest for a predetermined period of time, before they start paying back the principal as well. These are a great option for first-time homebuyers who are starting their careers.
The type of mortgage you take out will influence your decision when it is finally the right time to refinance your mortgage. In addition to finding out whether you will be required to pay a down payment, you should also keep abreast of daily mortgage rates.
Other payment factors
Some of the factors borrowers have to keep in mind in order to determine the cost of a loan are the principal and interest. In fact, this is why most borrowers will do rate shopping before taking out a mortgage. However, insurance and taxes are the other important factors that are usually packaged with the mortgage.
Since the home serves as collateral for the loan, most lenders will require borrowers to purchase insurance to cover the cost of the property in the event of a fire, floods, or other risks. Lenders will also want to protect themselves by ensuring borrowers can pay the property taxes relating to the home. These will not only affect how much you pay monthly but also influence when the right time to refinance your mortgage would be.
Mortgage loans and credit scores
One of the advantages of mortgages is that borrowers do not have to wait until they earn perfect credit or save the money to buy a home outright. Bad credit mortgage loans can come in handy in case of poor credit scores. However, it may take more planning and additional time to secure funding.
A subprime mortgage loan is a type of loan that is offered to borrowers considered to pose a higher risk to lenders. Some of the factors that lenders consider in order to categorize a borrower as a subprime borrower are the credit score, the amount of debt load and income. Subprime mortgages are usually extended to people with no credit or poor credit.
Even as you think about the right time to refinance your mortgage, you should understand how subprime status affects interest rates. Generally, subprime mortgages will have higher interest rates, meaning that the loan will cost more. The loans are also likely to have higher fees for applying and prepayment penalties. It is important to compare the interest rates charged by your preferred lender with the daily mortgage rates to determine whether taking out a subprime mortgage will help you meet your goals without unnecessary financial constraints.
What to know about interest rates
The importance of rate shopping when seeking to take out a mortgage cannot be denied. Similarly, it is clear that credit score has a direct impact on the interest rate that a borrower receives. Generally, the better the credit score, the lower the interest rates that a borrower will enjoy. This is why it is important for borrowers to take the necessary steps to improve or maintain their credit score. In the end, a poor credit score can prevent you from getting the home of your dreams or result in a mortgage with high-interest rates that you cannot afford to pay.
Understanding the relationship between credit score and interest rate is not enough. Homebuyers who want to take out a mortgage have to know how interest rates impact them. Since interest is what is paid back in addition to the principal loan amount, it will determine the total amount you will pay back to the lender.
Regardless of the term of the loan, the interest will also impact how much you pay back as monthly installments. By looking at this figure, it will be easy to determine whether you will be able to repay back the loan based on your income and other outstanding debts. When looking to determine the right time to refinance your mortgage, you should be mindful of the interest rate on your current loan.
Bad credit mortgage alternatives
Mortgage loan shopping helps borrowers to identify the various options available to them and make comparisons. Apart from taking out a subprime mortgage loan when they have poor credit, borrowers who can manage a small down payment can explore these options.
- Federal Housing Administration (FHA) loans: The FHA provides loans to people with a credit score of below 620 and can make a down payment of three percent.
- Veterans Administration (VA) loans: VA loans are low-cost mortgage loans that may not require any down payment.
- 2/28 Adjustable Rate Mortgage (ARM) loans: these loans offer a low-interest rate for the first two years before the rate rises sharply. Since this will affect the monthly installments, the two-year point would be the right time to refinance your mortgage.
- Bad credit loans: There are times when borrowers will have no option but to take out a bad credit loan. There are several factors that will determine whether you will need to apply for this type of loan.
While there are loans available for people with bad credit, they attract high-interest rates and take longer to get approved. The best way to avoid such frustrations would be to improve your credit score before applying for a mortgage loan. Those with excellent credit score should also strive to maintain it. This will ensure you enjoy affordable interest rates on the loan, a factor that will minimize the need to refinance your mortgage at some point.
Fees involved in buying a house
It costs a lot of money to buy a house. Apart from the purchase price, those who want to buy through a mortgage may end up paying several fees. The good news is that having a good credit score can help to cut down the home-buying costs significantly. Here are some of the extras that prospective homebuyers can expect.
Some of the basics of mortgage loans are that you will have to pay back both the principal loan amount plus the accrued interest. In case the money you have borrowed is more than 80 percent of the value of the property, you may have to buy primary mortgage insurance. In addition, the lender may want you to have homeowners insurance and pay the applicable property taxes. Depending on the neighborhood, the homeowners association may also have monthly or annual fees.
There are certain fees that property buyers will be required to pay at closing. It is important to understand these fees in order to have a seamless purchasing experience and avoid frustrations. The origination fee is charged by the lender for handling your loan. The fee covers administration costs such as application fee, processing fee, underwriting fee, and other relevant charges.
Some of the other expenses you will incur are third-party costs. In case an appraiser or title insurance was involved in helping you with the mortgage, you may have to pay the fees they charge. However, you can negotiate to pay the fees at a later date as opposed to at closing. Homebuyers should not be surprised in case they are required to pay taxes on the real estate transaction.
Considering the costs involved in buying a house, it is clear that refinancing a mortgage is a major decision. When looking to determine the right time to refinance your mortgage, you can talk to a financial expert to help you make the right decision.
How to know you are ready to buy a house
Although buying a house is a big milestone, it is not something that should be taken lightly. It is critical that prospective home buyers ensure they can afford the house they intend to buy. In case you plan to take out a mortgage, it is important to establish whether you will be able to repay the loan every month.
Here are some of the indicators that you are ready to embark on the journey that is homeownership.
Are you living paycheck to paycheck?
There is no doubt that owning a home is bound to be costly. Some of the expenses you will have to be ready to include the down payment and other added expenses. While some are one-off payments, others will have to be paid periodically. You should also consider putting aside some money for unexpected expenses.
Are you ready for stability?
Buying a home is an investment that will require you to stay in the home for a while. While you do not have to spend the rest of your life living there, you may have to spend at least five years in that area. You will have to consider this carefully before purchasing the property.
Do you know what you want?
With the huge investment that goes into acquiring property, you should ensure that the home you buy will meet your lifestyle needs and offer you the satisfaction you seek. Take time to think about the size of your family as well as whether you plan to raise your family here or sell it in the future.
Mortgage loan shopping can be complicated and confusing. Without the expertise and experience required to choose the right loan for your needs, you may end up making a number of mistakes. The good news is that mortgage refinance you an opportunity to make the necessary adjustments. However, you will have to know the right time to refinance your mortgage.
Shopping for a mortgage
Although mortgage loan shopping can take up a considerable amount of time, the information available today can help make the process faster and easier. Before the exercise can begin, borrowers should start by finding out their credit score and determine how much they wish to borrow. This should then be followed by how much they have for the down payment and the amount they can afford to repay. Once these have been determined, borrowers can proceed to look for a lender that meets their needs.
Rate shopping will be an important step at this stage. One of the most common ways of shopping for a mortgage is to approach traditional lenders such as banks. However, some people may opt to work with a mortgage broker in order to save time as well as avoid the hassle of doing the work on their own.
Over the past few years, a majority of homebuyers have been doing mortgage loan shopping online. This method allows consumers to see rates from mortgage rate tables, a factor that helps to simplify the process. We make it easy for borrowers to find the lender that will meet their unique needs through our platform. We also ensure that consumers work only with reliable lenders to avoid falling victim to common online scams. When you feel it is the right time to refinance your mortgage, work with us to enjoy a great and hassle-free borrowing experience.
Key considerations before refinancing your mortgage
Like many other financial transactions, mortgage refinancing is an important process that requires homeowners to do due diligence. Once you have determined that it is the right time to refinance your mortgage, you should ensure that you are aware of several factors. These include your home’s equity, your credit score, your debt-to-income ratio, the cost of refinancing, and the refinancing points. If you are to make the process hassle-free, you should also know your private mortgage insurance as well as your taxes. The last step would be to do rate shopping to ensure you do not end up paying significantly more in interest.
When done right, mortgage refinancing can offer borrowers numerous benefits. With the important role that credit scores plays, this step can help to ensure that you repay your mortgage loan more comfortably, moving you closer to your financial goals. However, in addition to identifying the right lender, you have to know the right time to refinance your mortgage.
The last consideration you will need to keep in mind is the daily mortgage rates. With the numerous lenders willing to offer mortgage loans, it will help if borrowers can identify reliable ones. We make it easy for consumers to find lenders who offer mortgage loans at affordable rates. As a third party that is not involved in the loan business, we also make it possible for borrowers to work with reliable and professional loan companies.
Cole is a personal finance research analyst and writer with extensive experience in building and maintaining a corporate brand utilizing both qualitative and quantitative methods. Cole has written on a diverse range of topics including financial planning, cryptocurrency, commercial real estate, and tax strategy. A graduate from Drexel University, Cole seeks to demystify financial borrowing and help individuals achieve financial freedom.