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Whether you are a first-time homeowner, a homeowner looking to remortgage their home, or a homeowner looking to sell and then purchase a new home, mortgages can be confusing. The mortgage industry involves a lot of technical terms that can make picking a lender, securing a mortgage, or paying off your mortgage more difficult than it should be.
Here is a helpful guide to the most frequently asked mortgage refinancing questions to help simplify any decision or challenge you may currently be facing.
What is Refinancing a Mortgage?
Refinancing a mortgage is the process of taking out a new loan on your home or property to pay off the current mortgage loan. It is usually done to lower the interest rate or access equity.
How Does Refinancing a Mortgage Work?
When you refinance your mortgage, you are in effect taking out a new mortgage loan to pay off the old one. While this may seem counterintuitive if you refinance and secure a lower interest rate you can lower your monthly payments and save thousands on your loan.
Does Credit Card Debt Affect Mortgage Refinancing?
Indirectly the answer is yes. When lenders look at mortgage applicants, they carefully analyze their income to debt ratio and their credit score. Credit card debt can negatively impact a credit score making you a riskier candidate for a loan. It can also increase your income to debt ratio making you a risker candidate for a mortgage. If possible, it is best to pay down credit card debt before applying to refinance a mortgage loan. My Rate Compass can help you see what interest rates you may be eligible for now and compare it to what interest rates you would receive if your credit score was higher.
How Much Can You Save By Refinancing Your Mortgage?
It depends on how much your financial portfolio has changed and how far into your mortgage you are. Factors that can dramatically affect the total costs of your mortgage include your current credit score, your current income, and current interest rates. If you have improved your credit score and interest rates fall there is a good chance that you could save thousands of dollars by refinancing your mortgage.
When is My First Mortgage Payment Due After Refinancing?
While this can vary between lending institutions, in most scenarios the borrower does not make the next month's mortgage payment. For instance, if your payments are set for the 1st of the month, you will not owe a mortgage payment on the first of the next month. Instead, you will begin making payments on the 1st of the second month. So if your mortgage refinance closes on August 14th, you will owe your first payment on October 1st.
Why Should You Consider Refinancing?
There are three reasons most people refinance their home: to reduce their interest rate, reduce their mortgage terms, or to access their equity and cash some of it out. If you have a better credit score now than when you first secured your mortgage, increased your income, or need cash now then you may be a good candidate for refinancing. If your primary goal is to receive a better interest rate, My Rate Compass can help you explore current market trends to determine what interest rate you are eligible for.
Refinance to Lower Your Mortgage Rate?
Interest rates change daily, monthly, and yearly. There is a good chance that mortgage rates have decreased if it has been over five years since you first secured your mortgage. In addition, mortgage rates are currently low due to the stress of the pandemic on the global marketplace. My Rate Compass is a great tool to use to determine whether or not current mortgage rates are lower than your current mortgage rate.
Refinance to Access Home Equity
Sometimes you need a large amount of cash upfront. College costs, bathroom remodels, or credit card debt all require cash. You can access this cash by refinancing your mortgage so that you can get access to your equity. In this case, you take out a new mortgage for the total worth of your home and then cash out the equity that you had already paid.
What to Look for When Refinancing a Mortgage
When refinancing a mortgage you need to look at the same things you likely did when initially securing a mortgage. You need to look at the proposed mortgage terms, length of a mortgage, current interest rates, and whether or not you want to access any of your equity. All of these factors should be favorable before you accept a refinancing offer. My Rate Compass can help you sort through the details to narrow down what interest rate you should expect before applying for a new mortgage loan.