When looking for ways to reduce monthly payments on a mortgage, many homeowners consider refinancing their homes. Not only can refinancing result in a lower interest rate, but it comes with many other benefits as well.
What Are Some Reasons for Refinancing?
In addition to acquiring a lower interest rate, some of the common reasons for refinancing include a change in financial goals, changes to the economy like recessions, and life events such as medical emergencies, accidents, job loss, death of a family member, and more.
What Are the Benefits of Refinancing?
One of the major benefits of refinancing is debt consolidation, which can do two things: shorten the length of a new mortgage and build equity. With enough home equity, debt consolidation can also significantly lower monthly payments, especially during a time when home market rates are lower than the rate of a homeowner’s existing mortgage.
Another major benefit of refinancing is obtaining money that can be used to serve other financial needs. This money can be used to fund a college education, purchase a new car, pay for a wedding and travel expenses. This money can also be used to pay off medical bills and other existing debts. The money can even be used to open a retirement account, buy stocks and investment properties.
In addition to debt consolidation and obtaining money, refinancing also offers safety from adjustable rates and can end costly payments on mortgage insurance. By refinancing, homeowners can get a fixed interest rate on their mortgage, which means their interest won’t change over time. This also means monthly payments will remain consistent and won’t increase over time. Similarly, by eliminating mortgage insurance payments, this puts homeowners in a better position to pay down their mortgages faster.
Do All Homeowners Qualify for Refinancing?
In an ideal world, everyone would be able to refinance their mortgages. Unfortunately, however, not every homeowner will qualify for mortgage refinancing for the following reasons:
- Low credit score
- High debt-to-income (DTI) ratio
- The home has an existing lien
- Owing more on a mortgage than a home is worth
Credit score and DTI ratio often go hand-in-hand as the latter often determines the former. In this case, the DTI ratio is determined by the number of debts a homeowner has, which includes student loan debt, credit card debt, car loan debt, personal loan debt and more. In many cases, the more debts a homeowner has, the lower their credit score will tend to be. To reduce DTI and increase credit score, a homeowner will need to pay off as many debts possible. Similarly, consolidating some of these debts with a debt consolidation loan can also help reduce DTI and improve credit score.
In the cases of liens, there are two types: voluntary liens (which mortgages fall under) and involuntary liens. An involuntary lien can include tax liabilities such as unpaid income and/or property taxes. A homeowner with an involuntary lien will need to clear those liens and file a notarized Release of Lien form to clear their title.
For homeowners who are paying more on their mortgage than their home is worth, there are programs in available to help them refinance. The most popular one is The Federal Housing Finance Agency’s Home Affordable Refinance Program (HARP), which is sponsored by the US government.
What Are the Requirements for Refinancing?
Since refinancing a home is the practice of replacing an existing mortgage loan with a new one that comes with a different term and a new interest rate, many of the same requirements apply. These include:
- An adequate credit score (preferably 620 or higher)
- An adequate home equity (the higher, the better)
- A good debt-to-income ratio (the lower, the better)
- Proof of income (W-2, 1099, pay stubs, tax forms, etc)
- Title insurance
- Affordable closing costs
For more information on how MCS Mortgage can help you refinance your mortgage, feel free to contact us via phone or email.