You may have bought your home with a high-interest loan, but you don't have to remain stuck with it. You can get a new mortgage at a lower rate.
The new mortgage will pay off the old one. And it helps in one of two ways. It can either lower your monthly payment, or decrease the amount you spend over the life of the loan.
When is the right time to refinance?
There are several occasions where refinancing makes sense.
When your credit score has increased.
A lower credit score means higher rates. If you've seen a significant jump in your credit score it may be time to see if a new lender is willing to give you a better deal.
How high does your new credit score need to be? A 20 point increase will drop your interest rate by 0.125 percent.
When interest rates drop.
If interest rates drop by more than 1% you should consider a refinance. A 1% drop can make a significant difference in your monthly payment.
Keep in mind any new loan will have fees and closing costs attached. The savings you receive will need to offset the expenses associated with generating the loan.
When your home loan is dangerous.
If you've got a risky subprime loan, refinancing can get you into something safer. Risky loans include balloon mortgages, and ARMs.
ARMs, with adjustable interest rates, can have payments that fluctuate wildly over the life of the loan. You know when your payment will go up on a balloon mortgage, but watching that date loom ever-closer can be nerve-wracking.
When you need to make repairs or renovations.
This is an option for people with a good bit of equity. But a cash-out refinance can pay the existing balance on your home, plus a little extra.
The new mortgage amount would include the extra cash you took out to improve your home.
When you've taken out a HELOC.
If you find managing two payments is a little too cumbersome you might be able to combine your HELOC with a traditional home mortgage when you refinance.
If you have an FHA loan that originated before June of 2009, and your rate is higher than 4.5%.
This would allow you to take advantage of a streamline FHA refinancing program. Unlike most refinances, you can get this loan even if you're upside down on your home. You won't even have to submit to a pull of your credit score!
What could stop you from refinancing your home?
In most cases, you can't refinance if you're upside down: that is, you owe more on the house than it's worth. This can happen if home values plummet in your area. The exception? If either Freddie Mac or Fannie Mae own your loan, you may qualify for a HARP loan.
It will be difficult to do if your credit score has dropped below 620. And a lack of assets or a drop in income can create problems.
Lenders are also wary of individuals who have recently changed jobs. It's helpful to hold yours down for at least two consecutive years before attempting a refinance.
Finally, don't try to refinance if you've listed your home on the market within 6 months. Lenders like you to be in your mortgage long enough for them to make back some interest. That's not going to happen for them if you sell the home right away.
How to Get Approved for a Refinance Loan
Applying for a refinance loan is almost like applying for a first mortgage. But you'll want to research your home's current value, as you'll be in a stronger position if values have gone up.
Then, visit with A&M Mortgage group to find the right refinancing package for your situation.