Financing 101: A Beginner’s Guide to Refinancing Mortgages

It’s not uncommon for first-time homebuyers to reconsider the current state of their mortgage’s terms. It can be due to a miscalculation in financial projections or a change in income gains. Thankfully, you can still take another offer on your mortgage through refinancing.

Refinancing your mortgage is an excellent way to change your current contract’s loan terms or interest rate. This lets you adjust your monthly mortgage payments while maintaining your principal balance. While it may seem like a simple readjustment of terms, there are several factors you need to consider when performing this financial decision.

The Basics of Refinancing Your Mortgage

It’s vital to understand the consequences and rewards of any financial decision. Being more aware of its different processes lets you weigh the pros and cons of altering your current financial plan. For this reason, it falls on your due diligence to be familiar with refinancing your mortgage.

In this article, we’ll share three things you need to consider when refinancing your home.

1. Loan Term Readjustments

Adjusting your loan score comes with many benefits, from adjusting your monthly mortgage payments to getting a more favorable interest rate. While these changes seem beneficial to make, it’s important to weigh how refinancing affects the term of your loan.

Since the terms will be adjusted, you should expect a shorter or longer loan repayment period, affecting your other financial plans. For example, this will have a bearing on your retirement projections.

2. Refinancing Factors

Like any loan, your lender will consider several variables to check your eligibility for refinancing your mortgage. This leads to assessing your credit score, debt-to-income ratio, and home equity.

• Credit Score: Different lending companies will have their own benchmarks for borrowers looking to refinance their mortgages. However, a safe number to aim for is around 620 or above on your FICO Score.
• Debt-to-Income Ratio (DTI): Lenders want to confirm that you have the financial capacity to pay off your new rate while covering your previous loan term’s closing costs. For this reason, you need to have a decent DTI below 50 percent. This is why it’s beneficial to close other debts to have a lower DTI ratio.
• Home Equity: Your home’s current home equity will factor in the opportunity with a cash-out refinance. Keep in mind that most lenders won’t give you beyond 80 percent of the equity you own. You’ll need to consult with your current lender to consider how much equity you work to gain when refinancing your mortgage.

3. Credit Score Impact

Every financial decision you’ll make will have some bearing on your credit score, which remains true with refinancing your mortgage. Before you finalize your application, you have around 45 days before your refinance will appear as a hard inquiry on your credit report.

If you’re currently applying for other loans, this will have a massive impact on your current credit score. This is why it’s best to strategize the timing for your refinancing to get the best rate available while making a minimal impact on your credit score.

Conclusion

Keep in mind that there’s a limited window that starts closing once you opt to refinance your mortgage. If you’re not ready to close your application within 30 days, it’s best to choose a different financial strategy. On the other hand, this 30-day window can be more manageable if you have a financing expert by your side. Instead of running back and forth to handle your finances, a full-service mortgage broker can help facilitate your numerous application requirements.

Connecting with experts is the only way to have a complete perspective on your financing options. At EST Home Mortgage, our professional full-service mortgage brokers give you the right financial options available. If you need a capable mortgage broker in Michigan, contact us today!