Wednesday, 21 October 2020

Guide to Refinancing Your Mortgage to Lower Your Payments

Guide to Refinancing Your Mortgage to Lower Your Payments
06 Mar
6:28

A mortgage is a big financial undertaking, and if you’ve recently had a large change in income or uptick in other expenses, you may feel unable to make the payments agreed to when you first signed on for a loan.

Fortunately, a mortgage refinance is one of a number of ways you can lower your monthly mortgage payments to make them more affordable. Keep reading to learn more about the refinance process, as well as other ways to rein in either the cost of your mortgage or other living expenses.

Who can refinance their home?

The basic requirements for qualifying for a refinancing are much like the initial eligibility requirements for applying for a mortgage. Typically, a lender will begin by looking at your credit score, current debts, income and the value of your home. Lenders will also look at your loan-to-value ratio (LTV), a measure of your loan amount compared to the purchase price of your home. As a borrower, you’ll probably get the best interest rate on a new mortgage if your LTV is 80% or lower.

The interest rate you’re offered for a refinance will also depend on the amount you’re requesting to borrow, the remaining amount on your current mortgage and other debts you may have. This means you might be offered a loan with more — or less — favorable terms than your original mortgage.

To up your chances of getting a refinance loan, you may first need to work on increasing your credit score, paying down debt or growing the equity in your home. For example, if the equity you have in your home is less than 25%, you may need a credit score of 680 to 700, depending on your debt-to-income (DTI) ratio.

It can be difficult to get refinancing if you have a history of monthly mortgage payments that don’t cover the minimum interest owed on your loan or the current value of your home has fallen below the amount owed on your mortgage. This is called negative amortization and it means your monthly payments are not enough to cover the interest that is continuing to accumulate, so your loan balance is now higher than what you first borrowed or what your home is currently worth.

In a situation like this, you might be tempted to refinance your loan to get a lower monthly payment, but most likely this will only extend the time you need to pay off your loan. Still, some homeowners may be able to get refinancing help from certain federal programs like the Home Affordable Refinance Program (HARP).

How refinancing can lower your payments

If you’re like most homeowners, the biggest immediate benefit you’ll see from from a refinancing is a drop in your mortgage interest rate and, as a result, a drop in your monthly payments. Maybe you bought your home years ago with an adjustable-rate mortgage (ARM), and with the recent drop in interest rates, you hope to possibly save more with a fixed-rate loan. Over the course of your loan, a refinancing might save you thousands — perhaps even tens of thousands — of dollars.

Still, like your original mortgage, your refinanced mortgage will come with closing costs, which means you’ll need to weigh potential savings against any upfront fees you’ll be expected to pay. Closing costs can vary a lot according to where you live and your lender, but on average they’ll cost between 3% and 6% of your new loan amount.

To make sure a refinance really will help save you money in the end, compare loans from a few lenders and check out LendingTree’s refinancing calculator to compare rates and offers. LendingTree is the parent company of MagnifyMoney.

Alternatives to refinancing to lower your payments.

Recasting your mortgage is another way to potentially lower monthly payments without having to refinance, and you may want to ask your lender about this option. Recasting, or reamortizing, a mortgage basically means extending the terms of the loan. Since you’ll have longer to repay the debt, your monthly payments will be lower.

By recasting your mortgage, you will be paying more interest over the life of your loan. However, this can be a good immediate solution for borrowers who need to quickly lower their monthly payments. Most lenders don’t consider recasting to be a formal refinance and will agree to extend your loan for a fee of $250.

If refinancing or recasting your mortgage won’t work for you, it may be time to think about downsizing your home. This isn’t a popular solution, but it’s worth considering if you are no longer able afford your monthly mortgage payments and your home is bigger than your current needs.

Downsizing has another advantage: It may enable you to use the equity from the sale of your current home to buy something smaller — debt free. Still, moving can be expensive, and if the equity you gain from the sale isn’t enough to cover the cost of your new home, you’ll still have to contend with a new set of mortgage closing costs.

How refinancing can help you consolidate debt

While a refinance can help you better shoulder monthly mortgage payments, it can also help pay for other expenses, like a new bathroom renovation or sudden college costs. To pay off other debts, consider a cash-out refinance, which allows borrowers to take out a new mortgage for a higher amount to pay off the previous loan while also giving them access to cash.

Cash-out refinancing might be a good idea if you need the extra money, since these types of loans can help you avoid having to take out a personal loan on top of your current mortgage loan. Cash-out refinances also have lower interest rates than do personal loans.

Like any loan, the larger the cash-out refinance, the more interest you’ll pay. It’s important to note that since a cash-out financing will exceed the value of your previous mortgage, the fees and interest you’ll pay may end up being significantly higher. To see how much a cash-out refinance might cost — as well how much the cost might vary on factors like your credit and LTV scores — check this cash-out refinance calculator.

Alternatives to refinancing to consolidate debt

If you decide not to refinance, here are other ways to deal with high living costs or consolidate your debt.

  • Personal loan Terms for this type of loan vary quite a bit depending on the lender and your financial assets and needs. According to data collected by LendingTree, recent rates for consumers with average credit range from about 4% to 30%. If this is the best option for you, be sure to carefully compare personal loan rates.
  • Home equity loans If you feel comfortable borrowing against the equity in your home, you’ll probably get a better rate than for a personal loan. However, if you default on the loan, you risk losing your home.
  • Credit card balance transfer Some credit cards offer a zero- or low-interest period during which you could transfer over debt from some other financial obligation and pay it off with either no or very little interest. However, expect to possibly pay a 3% transfer fee, as well as a higher interest rate after the grace period is over.

The bottom line

A refinance is a popular way to lower monthly mortgage costs and possibly also pay for other expenses or consolidate debt. Still, if a refinance isn’t for you, or you don’t qualify, look at other options. Whenever taking on new debt, it’s important to do the math and make sure the new debt really is a better deal than what you currently have.

This article contains links to LendingTree, our parent company.

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Larissa Runkle

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