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Refinancing Your Home Loan: 2-Minute Guide!
Today’s interest rates remain at all-time record lows, and that means it might be a good time to consider refinancing your home loan, especially if you’ve had it for several years. Refinancing can help you get a lower interest rate or allow you to change the length, or “term,” of your mortgage, making it more affordable for you. Of course, every homeowner’s situation is different, and there are a lot of factors that can determine whether or not refinancing is the best choice for you. Here are a few guidelines to help you decide if refinancing your mortgage is right for you:
- Interest rates have decreased. If the new loan has an interest rate that’s at least a half point lower than your current rate, it usually makes sense to refinance; the greater the difference between your current rate and the new rate, the more savings you’ll experience.
- Your credit score has increased. Loan rates are based mostly on creditworthiness, so if you’re score has improved since you took out your original mortgage, you might qualify for a significantly lower rate. Many lenders have also lowered their credit requirements in recent years which can also help your ability to qualify for a lower rate.
- You can handle a higher monthly payment. If your income has changed, you may want to switch to a shorter term that will allow you to pay off your home more quickly – and often at a lower rate – than a long-term mortgage.
- You intend to move in a few years. Switching to a low-rate adjustable rate mortgage (ARM) can be a good choice if you’re planning to relocate before the adjustment kicks in. You’ll pay less now and can put more money in savings to put toward your next home.
- You want to get rid of private mortgage insurance (PMI). Once your loan balance is below 80% of your home’s value, you usually can get rid of costly PMI. A refi is a great way to do just that while also restructuring your loan to more favorable terms.
- Your ARM is about to adjust. If you have an ARM and that low introductory rate is about to readjust, refinancing can let you lock in a low rate and help you avoid regular adjustments over time that can be costly.
In a nutshell: The refinancing process
- Refinancing is very similar to the process involved in securing your current mortgage:
- Begin by shopping around for the best rates and terms for your budget and lifestyle.
- Gather financial documents like tax returns and paystubs.
- Fill out paperwork (in most cases, this can be done online or with a phone call).
- The lender will review your paperwork, evaluate your creditworthiness and, usually, conduct an appraisal of your home’s value.
- Go to closing and sign your loan. Loan funds will be distributed, your old mortgage will be paid in full and your refinance mortgage will become the mortgage of record.
Today’s lenders have made the refinancing process simpler than ever, and most loan approval decisions are made the same day you apply, which means there’s no long, nerve-wracking waiting period. Take a good look at your situation, and if a refinance seems like it might make sense for you, go ahead and take the plunge: With the potential to save tens of thousands of dollars, it just might be one of the best financial decisions you’ve ever made.