Refinancing to a lower interest rate can lower your monthly payments and save you thousands of dollars over the term of your mortgage. Convert your adjustable rate mortgage to a fixed rate mortgage, refinance your balloon payment, or shorten your 30 year term to a 15 year term.
The process of refinancing your existing mortgage allows you to exchange your current mortgage for a new one. During this exchange, your lender pays the balance of the old loan and then you can begin to make payments on the new loan.
Why should you consider refinancing?
There are several benefits to refinancing your mortgage. The most common reason is to get a lower interest rate. You may also want to refinance to consolidate debt.
What types of refinancing are there?
When you refinance your mortgage, you can choose from all the same option as when getting a new mortgage. Below are the most common types of mortgages:
- Conventional Mortgage - This is the category that most loans fall under. These are issued by banks and other private lenders, which results in one of the toughest underwriting requirements and consequently one of the most difficult loan types to quality for.
- Government-Backed Mortgages - These are subsidized by the government, protecting the lenders against defaults on payments. This makes it a lot easier for lenders to offer potential borrowers lower interest rates. The goal of this loan type is to make home ownership affordable to lower income households and first-time buyers.
- Federal Housing Administration (FHA) Loans - Similar to Conventional loans, these are also issued by private banks and other lending institutions. The key difference is that the federal government guarantees FHA loans. This government backing reduces lender risk, making these easier to qualify for and can require as little as 3.5% for a down payment.
- Veteran Affairs (VA) Loans - Aimed to help service members, veterans, some members of the reserves or National Guard, and some surviving spouses, this type of loan requires little to no down payment and no private mortgage insurance. U.S Department of Agriculture (USDA) Loans - For low to moderate income borrowers in eligible rural areas. To qualify, you must meet certain income and other requirements.
How does my credit rating affect my home loan interest rate?
Lenders review your credit as a means to paint a picture on how well you have handled your past finances and use this information to predict your future financial risk. Having a higher credit score means less risk for lenders, which can mean lower down payment requirements for your loan.
How long does refinancing take?
While every loan is different, refinancing is quicker than a new purchase as you are already established in your home. Some factors can affect the timeline, such as types of documentation required and the terms of your loan.