Refinancing Q&A with EnTrust Funding
There’s a lot of buzz about refinancing in the news lately, what with lower interest rates and a relatively stable housing market. Homeowners may be wondering if it’s an opportunity to pursue or to swat away, so let’s look at the whys and hows of refinancing your mortgage.
Refinancing requires replacing your current mortgage with a new loan, meaning the process is similar to what you went through to purchase your home originally. There are typically four main reasons to refinance that include:
The most popular current option for refinancing is to take cash out of the home’s equity. When the value of the property has increased and/or the rates have dropped, homeowners can take the difference between the new loan and the home’s appraised value as “cash out.” The benefits vary from borrower to borrower, but it’s often an excellent way to consolidate debt or re-invest into the home by remodeling or improving its value. The proceeds are tax-free which adds to the appeal of this option.
LOWER MONTHLY PAYMENT
If the current interest rates are lower than when the home was first purchased, then refinancing can reduce the monthly payment, freeing up more income for savings or other needs. In addition, refinancing can eliminate mortgage insurance that may have been required on the original loan, putting even more money in your pocket each month.
REDUCE THE RATE
Adjustable rate mortgages mean monthly payments can go up or down, depending on interest rates. Homeowners who seek the security of a fixed rate may want to refinance with that objective in mind. Even if the difference isn’t significantly noticeable, the long-term peace of mind is.
Another long-view advantage of refinancing is to shorten the term of the loan from a 30-year to a 25, 20 or 15-year mortgage. While the monthly payment will probably be higher, you’ll garner a better interest rate, resulting in more equity in the home and a bigger reduction of the overall life of the debt. This ultimately puts you on track to pay off the mortgage while still owning your home!
If any of those “whys” speak to you, then it’s time to explore the “how.”
Just as when you originally purchased your home, a lender will look at several factors for approval. Refinancing can often be a smoother process, but your credit score will still be considered, as well as your debt-to-income ratio (DTI). Depending on the lender and the type of loan, a DTI of 50% or lower is ideal. This means that your monthly income should be at least double your monthly debts, including mortgage payment.
Having an idea of your home’s worth before starting the process will give you the confidence to proceed. If neighborhood values have increased and you’ve been steadily building equity in your home, then refinancing could be an easy decision. Most lenders require at least one year in the home before refinancing an existing mortgage.
With the housing market and interest rates in constant motion, it’s a good idea to look at your personal finances and needs. At EnTrust Funding (ETF), we have a team of lending experts and a variety of programs for all types of homeowners. With a simple conversation we can help you determine the why and how of your refinancing opportunities. Give ETF a call today for all the answers.