Refinancing a home loan is an excellent way to lower mortgage payments. First-time home buyers do not always have the economic means to secure the best loan, but as time passes, that can change. When one’s financial situation has improved, the homeowner often wants the loan to replicate that change. For that to transpire, they must refinance into a more favorable mortgage. In this article, we'll uncover the pros and cons of refinancing and provide an example of how it can help achieve your financial goals.

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A common issue homeowners encounter is deciding on where to refinance. Is it best to refinance with the current lender? The following guide will spotlight the options, enlighten homeowners on what to look for in a mortgage refinance company, and discuss mortgage rates and closing costs. In today's content, we will cover various aspects of refinancing, such as credit cards and their role in determining eligibility.

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Why Refinance a Home Loan?

Refinancing a home loan means the borrower is replacing their current mortgage with one that has more advantageous terms and conditions. If you're unsure about a refinance, it's essential to know that doing so can save money in the present or over time.

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Following are some reasons why a refinance is worth considering:

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• Lower the Mortgage Interest Rate: Many homeowners refinance for a lower mortgage rate, which results in a lower monthly mortgage payment. Whether they refinance due to an increase in their creditworthiness or a decrease across market rates, a new loan with a reduced interest rate helps borrowers build home equity sooner.
• Shorten the Loan Term: Borrowers who have improved their financial situation since the initial purchase may choose to refinance for a shorter-term loan, such as a 30-year mortgage into a 15-year mortgage. With a shorter loan life, homeowners decrease their interest over time, despite spending more every month.
• Change the Loan Type: There are two types of mortgages: fixed rate and adjustable rate. Homeowners with an adjustable rate may not want to endure the unpredictability. Therefore, they refinance to a fixed-rate loan to lock the interest rate in at a constant figure.
• Cash Out on Home Equity: In addition, it is common for homeowners to choose to refinance to cover the costs of home improvements. Refinancing into a loan worth more than the current balance allows borrowers to receive the difference in cash to spend on repairs and renovations.
• Get Rid of Mortgage Insurance: A down payment of less than 20 percent on a conventional home loan results in paying for private mortgage insurance (PMI). When refinancing a loan where the home equity exceeds 20 percent, homeowners avoid paying PMI.

How Does Refinancing a Mortgage Work?

The steps toward a mortgage refinance are similar to a home purchase. So after going through the initial home-buying experience, refinancing is more straightforward. The average timeline for a refinance falls between 30 and 45 days. 

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To get a better idea of the process, follow each of the steps below:

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1. Apply to Refinance: Get pre-approved with a lender of your choice. Complete the application and provide the lender with the necessary documentation.
2. Lock In the Interest Rate: Secure the interest rate so the loan is not at risk of increasing before closing.
3. Undergo Underwriting: The lender will review your application, ask follow-up questions, and prepare the loan for closing.
4. Get a Home Appraisal: Work with the lender to appraise the property to determine the value.
5. Close On the New Loan: Closing day involves the borrower signing multiple disclosures and documents, finalizing the new mortgage, and paying the closing costs.

Mortgage Refinance Requirements 

To qualify for a refinance, homeowners must meet particular conditions set forth by their lender and loan program. These requirements are similar to those that first-time home buyers must meet, such as creditworthiness and proof of sufficient income. However, refinancing adds another provision to consider: home equity. 

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Before applying, confirm these prerequisites:

Credit Score

Like purchasing a home, the better the credit score, the lower the interest rate. It’s the same for refinancing loans. Conventional mortgage loans often require a credit score of at least 620. Government-backed loans have less strict demands. For instance, the minimum score needed for an FHA refinance is 500. Alas, the lender has the final say in determining the requirements.

Debt-to-Income Ratio

To be eligible for refinancing, you must also have an income. You should have no trouble getting approved if your earnings have stayed the same or grown while the debt has reduced. Most lenders won't accept a loan if the mortgage exceeds 30 percent of the gross monthly income. 

Loan-to-Value Ratio

The process of refinancing a mortgage can be influenced by various factors such as loan amount, market value, and financial qualifications. Researching the best options for your situation, including taking into account any existing student loans or business expenses, can help ensure you receive the best deal possible. The loan-to-value ratio (LTV) is a key risk that lenders consider. LTV calculates the remaining balance concerning the market value of the property. Companies that refinance mortgages require at least 20% home equity and an LTV ratio of up to 80%.

Three Types of Refinance Mortgage Loans

Whether homeowners are refinancing their conventional or government-supported mortgage, there are three standard options. The most sought-after loans are rate-and-term, cash-out, and streamlined refinancing. House points, compensation for lender fees, and other expenses may also impact the overall cost of refinancing.

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Learn more about each loan option below.

Rate-and-Term Refinance

The most typical mortgage refinancing is this one. Homeowners borrow the remaining amount on their mortgage at a new interest rate and terms. This option allows borrowers to refinance an adjustable-rate loan into a fixed-rate loan at a frugal interest rate. A 30-year adjustable-rate mortgage, for instance, may be converted into a 15-year fixed-rate loan.

Cash-Out Refinance

Homeowners looking to take advantage of their built-up home equity can consider a cash-out refinance. This option can alter the interest rate and other terms, but the amount owed on the mortgage increases. Receiving cash at closing is a benefit, which is added to the mortgage balance. Borrowers must have enough home equity to refinance and take money out.

Streamline Refinance

Refinancing through government programs such as the Federal Housing Administration, Department of Veterans Affairs, or Department of Agriculture can lead to more affordable terms. FHA, VA, and USDA loans have different qualifying standards, but each requires less paperwork and sometimes does not require a home appraisal.

Choosing a Refinance Mortgage Lender

Compare interest rates and costs lenders charge if you're considering refinancing to decrease your mortgage rate. You should ask the lenders for these details because many don't reveal fees or rates online. To know how much the loan will cost, apply for numerous loans and obtain estimates based on your credit score, loan-to-value (LTV), DTI ratio, and other financial information.

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Receiving several loan quotes is prudent to lock in the lowest rate possible. The best estimate can be used to bargain with other lenders, leading to a better interest rate or decreased administrative costs. Ask about discounts, such as appraisal waivers that could be available. Customers of certain banking institutions may receive rebates, and military reductions may also be available.

Refinancing With Your Current Lender

If your existing mortgage provider offers a competitive rate and you are satisfied with its service, you can refinance with them. Alas, even if you’ve had a positive experience with your current lender, that doesn't mean you shouldn't look into other possibilities. Always make sure to understand the conditions of a new mortgage before signing.

Where to Find the Best Rates for Refinancing

Refinance rates fluctuate and depend on economic developments such as inflation and employment opportunities. Nonetheless, the borrower’s financial status, decided by elements like their credit score and loan-to-value ratio, also impacts the rate. Request multiple quotes from different lenders to obtain the most affordable refinancing rates.

What to Look For in a Mortgage Refinance Company

It's essential to choose the best possible lender. Limit your options based on loan types, interest rates, and customer service to make the most effective choice.

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• Mortgage Products Available: The first step is finding a lender with the desired refinancing option. Various refinancing loans are available from lenders, so find a suitable loan at a reasonable price. 
• Comparable Interest Rates: Compare rates by prequalifying with different lenders. Identify the annual percentage rate (APR), too, as that accounts for interest rates and other costs associated with the loan, providing the yearly rate.
• Customer Service Ratings: Refinancing is a long-term commitment, so choose a lender that provides exceptional service. When researching, examine each company’s reviews and ratings to see what past customers have to say.

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Refinance With Wesley Mortgage

Wesley Mortgage is Nashville’s mortgage company and a fantastic option for homeowners’ refinancing needs. Whether you’re looking for a mortgage rate quote or seeking advice on your next steps, consult with the staff at Wesley Mortgage for expert assistance. We will help you find the best mortgage loan type for your budget and desired property.