Refinancing your mortgage will pay off your existing home loan and replace it with a new one. Potential benefits may include receiving more favorable terms, like a lower interest rate or lower monthly payments, or switching from an adjustable rate to a fixed rate. Refinancing could also let you tap into the equity of the home to take cash out for home improvements. Keep the following tips in mind if you’re considering a refinance:
Know How to Qualify
To qualify for refinancing, you will likely go through an approval process similar to what was needed for your original loan. These three factors weigh heavily in this process: (1) your credit score; (2) your income; and (3) whether there is sufficient equity in your home. In general, the higher your credit score and income, the better the terms that will be available to you. If your financial situation has changed considerably since your original loan, you may still be able to qualify for government-sponsored loan programs available for those with less-than-ideal credit or income.
Understand the Rates and Terms
In considering a mortgage refinance, it’s important to know what interest rates, monthly payments, and loan terms may be available to you. The Federal Reserve periodically adjusts federal loan interest rates to stimulate or slow down the economy, and being familiar with rate trends is crucial when you’re looking to refinance your home loan. A half of a percent difference in your rate could mean thousands or tens of thousands of dollars in savings over the life of your loan. Shortening your loan’s term may mean you could pay it off sooner and be able to enjoy your home debt free.
Consider Cash-Out Opportunities
A cash-out refinance allows you to take funds from your home’s built up equity (the difference between your home’s current market value and the mortgage balance remaining). You could use this cash for any purpose, including paying off high-interest credit card debt. If you use it for home improvements, you could even build equity right back into your property with renovations that increase its appraised value.