Refinancing your home might be a great way to save money or tap into the capital needed to pay off large debts. However, a refinance can also be an expensive endeavor, and you could even risk harming your credit rating or risk foreclosure if you're not careful.
Before you take the plunge with a refinance, here are five essential questions that you should ask before signing on the dotted line.
How Much Equity Do I Have In My Home?
Many homeowners today owe more on their mortgage than what the property is actually worth. For mortgage refinancing to be possible, a homeowner must have at least 20 percent equity in their home in order to avoid paying private mortgage insurance. The benefit of refinancing would be negated if PMI has to be added to the cost of the new loan.
Do I Have A Good Credit Score?
The health of your credit score plays a huge role in the type of mortgage rate you'll be able to qualify for.
Since mortgage rates operate on a sliding scale, the lowest rates tend to be offered to those with a credit score of 720 or more. Borrowers who have a score under 620 may have trouble qualifying for a decent rate, let alone getting approved at all.
Will I Qualify For The Rate I Want?
You might be able to get a general sense of the type of interest rate you could get for a refinance as quoted on major financial websites like BankRate.com, but your specific financial details, such as the type of loan you'd like to refinance into or your credit score, will influence the actual rates that will be available to you.
If you don't qualify for the lowest advertised refinance rates, it's important to determine if it's still worthwhile to refinance your mortgage at the rate you qualify for.
Will I Have To Pay A Penalty?
Most mortgages have a number of rules attached to them, including penalties for breaking a current mortgage before it comes up for renewal. It's in your best interest to find out if there are any penalties and, if so, what that dollar figure would be.
Some penalties are so high that that they no longer make the refinancing cost-effective. Reading the fine print on your mortgage contract is crucial.
Do I Have A Second Mortgage?
Borrowers who have a second mortgage might face additional challenges when it comes to refinancing their home. In this case, you may either pay off the second mortgage or combine both loans into a bigger first mortgage.
Otherwise, the lender providing the second loan has to agree to staying in second place behind the lender holding the first mortgage, which they might not necessarily be willing to agree to.
The bottom line is: refinancing might be a great way to help you pay off large debts or save money. However, it's critical that you analyze your specific financial situation in order to avoid getting yourself into a worse position where the only party benefitting from the refinance is the loan officer.
Get in touch with an experienced mortgage specialist today to discuss your needs and to determine if refinancing your home is right for you.
Labels: Home Mortgage Rates, Refinancing, Second Mortgage
Generally when you are purchasing a home, you are buying below the appraised value and you are making a down payment. The good news is this means you have "instant equity" in your home.
For some homeowners, this means may be considering taking cash-out from your home equity in order to pay off credit card bills, purchase a car or pay for college for one of your children. However, it is important understand, this may not be as simple as it sounds.
Cash Out Refinance, Equity Loan Or Second Mortgage
There are three basic ways to access the equity in your home which are common these include:
- Cash Out Refinance - you refinance your current mortgage and you request cash-out for the equity. For example, if your home is worth $200,000 and you have a current mortgage of $100,000 you may be able to access an additional $60,000 to $70,000 in cash depending on your lender's requirements.
- Home Equity Loan - a home equity loan is typically a line of credit that you take out with your local bank. These loans are typically what are known as "revolving" where you can access the funds over and over again as you make payments. Home equity loan interest payments are generally not tax deductible.
- Second Mortgage - in order to qualify for a second mortgage on your home, the lender would require you to meet specific credit requirements as well as certain debt-to-income ratios. Generally, new mortgage borrowers will not qualify for a second mortgage.
In most cases, lenders will require borrowers to have had their mortgage at least one year before they are allowed the option of any type of cash-out refinance.
What's So Special About One Year?
The one year may seem subjective but there are some important things to keep in mind. When you applied for your original mortgage, your lender based their decision on your existing credit.
Before you can take cash out, you may need to demonstrate a history of making your mortgage payments on time, as agreed.
While you may already have a substantial amount of equity in your home, lenders are taking an additional risk if you are allowed to "tap into" that equity. Before you make the decision to access the equity, talk to your lender regarding possible restrictions including prepayment clauses.
Labels: Home Equity Loan, Homebuyer Tips, Second Mortgage
