Refinancing involves the replacing of an existing loan or debt with a new one with updated terms. Mortgage loans are most often associated with refinancing due to the many benefits they provide homeowners. They’re currently popular due to record low mortgage rates as a result of the economic impact of the COVID-19 pandemic. Knowing when to keep your current terms and when to refinance can be tricky, so let us take you through an overview of refinancing and some of the benefits you could gain from doing so.
Reasons to Refinance Your Mortgage
Lower Your Interest Rate
The most popular reason many people refinance their mortgage is to lower their interest rate. This makes sense, as a lower interest rate means you’ll pay less money over the life of the loan. If you’re financially able, you can even pay more on the principal each month in order to pay your mortgage off early, saving you even more money.
What's more, if your financial situation is not stable, a lower interest rate could mean a lower monthly payment. This could help save you some money each month to handle other pressing financial matters like medical emergencies or car issues.
Shorten the Length of Your Mortgage
If it’s an opportune time and rates are low, you may have the chance to change the length of your existing loan to a shorter one without altering your monthly payment too much. You might also be in a better financial position than before and want to shorten the term of your loan so that you can make higher monthly payments with reduced interest to boot.
Modify Your Mortgage Type
You may be seeking to change the type of mortgage you have, whether that’s from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage or vice versa. As the name indicates, a fixed-rate mortgage has a fixed interest rate, and payments remain the same throughout the mortgage term as a result. If you have a fixed-rate mortgage and have been paying the same interest rate for many years, switching to an ARM can be beneficial if rates are falling.
While ARMs will typically offer a lower interest rate upfront, rates fluctuate based on market conditions, which could eventually result in a higher rate. In these cases, refinancing and changing the mortgage type can result in a lower interest rate, especially if rates are as low as they are currently.
Cash out refinances are often used by those wanting funds for home improvements. With this type of refinancing, you can secure funds for any financial needs by leveraging the equity in your home.
Equity is the difference in what your home is currently worth and the amount you still owe on your mortgage. Say your home is valued at $180,000 and your mortgage balance is currently $80,000. This would leave you with $100,000 of equity in your home that you could potentially borrow against. However, it’s a good idea to keep some equity, and many financial institutions will only let you go down to a specific amount of equity.
While this option would result in a higher mortgage balance, it provides you with access to funds you can use on expenses, projects, vacations and more.
The Rules of Refinancing
To get started, you’ll need to apply for a loan. The following are some of the criteria lenders will have:
As with most loans, credit scores will have a major impact on the interest rate you’re able to qualify for. Your credit score could also bar you from eligibility if it’s below a certain threshold. Most financial institutions will require a minimum credit score of 620 qualify for refinancing a conventional loan (fixed-rate and adjustable-rate mortgage).
Home Equity and Loan-to-Value Ratio
The loan-to-value ratio of your home is the amount owed on your mortgage divided by the value of your home. You’ll typically want a LTV of at least 80% (or 20% equity in your home) if you want to refinance, though lower is even better. That’s not to say it’s impossible if you have more than that (and have excellent credit), but 80% is the sweet spot.
A proven track record is required to qualify for refinancing, and you can normally only be considered if you’ve had your mortgage (and have been making regular payments) for a period longer than 6-12 months.
The Usual Suspects
This category encompasses the other things you would require for a regular loan, like proof of income, insurance verification, title insurance and more. You’ll also need pertinent information about your current mortgage, as well as any other debts that you have.
A Few Things to Remember
You’ll still need to pay closing costs, like application fees, inspection fees and more, so be sure you can afford those before you start thinking about refinancing. Refinancing, like the regular mortgage process, can also be time-consuming, that’s why the mortgage experts at FCU can help make the process as easy as possible.
Florida Credit Union is ready to be your refinancing partner! We’re here to help, so take our “Time to Refinance?” calculator for a spin or reach out to our mortgage experts over the phone or in a branch to get the process started!
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Florida Credit Union is a full-service financial institution. Founded in 1954 as the Alachua County Teachers’ Credit Union, FCU now services over 120,000 members in 45 counties throughout North and Central Florida. For more information on the services we provide, visit FLCU.org or call us at 1-800-284-1144.