Tips on Refinancing Your Home

A refinance on your mortgage pays off your existing home loan and replaces it with a new one. Some of the benefits could include securing more favorable terms, like lower interest rates or lower monthly payments, or locking in a fixed rate from an adjustable one. Refinancing could also let you access the equity of your home to take cash out for improvements or renovations. If you’re considering a refinance on your home loan, keep the following useful tips in mind:

Understand How to Qualify

Qualifying for a refinance typically requires an approval process similar to that of your original loan. Several important factors carry weight in this process:  (1) your income; (2) your credit score; and (3) the amount of equity in your home. In general, the higher your income and credit score, the better the available refinance terms. In the event that your financial situation has substantially changed considerably since you qualified for the original loan–meaning your income has fallen or your credit score has decreased–you may still have options for assistance through government-sponsored loan programs.

Know the Rates and Terms

If you’re in the beginning stages of considering a refinance, it’s critical to know what interest rates, monthly payments, and loan terms may be available on the market. Since the Federal Reserve periodically adjusts federal interest rates, being familiar with current rate trends could help if you’re looking to refinance your home loan. A one percent difference in your rate could mean thousands or tens of thousands of dollars in savings over the life of a loan. The term of your loan could also have a big impact on the value of a refinance. Shortening the term, for example, will allow you to pay off the loan sooner so you can enjoy your home free and clear with no debt.

Evaluate Cash-Out Opportunities

Doing what’s known as a “cash-out refinance” lets you take funds from your home’s equity, which is the difference between the current market value of your home and the remaining balance on the loan. The funds you take out can be used for any purpose, including paying off credit card debt or personal loans with higher interest rates. They can even wisely be used for home improvements. This way you can build equity right back into your property with renovations that increase its appraised value.