By Laura Byrum with FirstBank
Interest rates remain near historic lows, making it the perfect time to refinance and modify original mortgage terms. Refinancing is the process of replacing an old mortgage loan with a new loan. Some people refinance with the goal of getting a lower interest rate and monthly payment, whereas others refinance to pull money from their home equity. So whether you’re looking to pull cash from your equity, reduce your mortgage rate, or change your mortgage term, here are three questions to ask yourself before applying for refinancing.
How much equity do I have?
Buying a home is an opportunity to build wealth over time through equity, which is the difference between what you owe your mortgage lender and the current value of your home. And one benefit of refinancing is the option to get cash from your equity with a cash-out refinance. A cash-out refinance replaces your mortgage with a new loan of a higher amount—in which case, you’ll receive the difference as a lump sum. However, the ability to refinance—and tap your equity—depends on the amount of equity in your home. Before you’re able to refinance, most lenders require a minimum of 5% to 20% equity. And you’re typically able to borrow up to 80% (sometimes 90%) of your home’s equity. An appraisal determines the current value of your home.
Do I have good enough credit?
Keep in mind, too, that having an existing mortgage doesn’t guarantee approval. Interest rates are directly tied to credit scores, and borrowers with higher scores usually qualify for the best rates. Since refinancing replaces your current loan, it also involves applying for a new mortgage. And in most cases, the lender will verify your income and credit to ensure you meet the minimum qualifications for a particular program.
Should I refinance to a 15-year mortgage?
Choosing another thirty-year term offers the most affordable payment, but it is more costly in the long run. You’ll end up making more payments, and you’ll pay more in interest over time. Depending on the age of the original loan, it might be better to choose a shorter term for the new mortgage, perhaps a fifteen-year term. Switching to a shorter-term is often more affordable when you’re not pulling cash from your equity, meaning your loan balance doesn’t increase. Refinancing can modify the terms of your mortgage loan, reduce your monthly payment, and you can even pull cash from your equity. But the process doesn’t make sense for everyone. It’s important to know what’s involved and the minimum requirements to qualify.
Laura serves as the Vice President and
Mortgage Marketing Director for FirstBank.