Being a homeowner is beneficial because you have a place where you can relax and do as you please. However, most people can't afford to pay for a house out of pocket, so the only option is to get a mortgage. Unfortunately, mortgage rates differ among lenders, so they often get too high. Luckily, refinancing your mortgage is an option.
Refinancing your mortgage is where you replace your current mortgage with a new one to secure a lower interest rate and monthly payment. This is beneficial because you can reduce your monthly payments and shorten the length of your loan. However, few people choose to refinance their mortgage because they think it will be more expensive in the long term and too complicated. This isn't the case, so we're here to guide you in this article.
How Refinancing Your Mortgage Works
When you refinance your mortgage, you get a new loan to replace your current mortgage. The interest rate and monthly payment will be different. You can either lower your interest rate or extend the length of your loan. This will lower your monthly payment. If you extend the loan length, you'll pay more interest in the long term. If you're in a position where you can't afford your current mortgage, this may be your best option.
However, the downside to refinancing your mortgage is that you'll have to pay closing costs because it's a new loan. This includes origination, appraisal, and other miscellaneous fees that can add up to a few thousand dollars. Furthermore, you may also have to pay private mortgage insurance if you don't have 20% equity in your home because lenders require it for loans with lower down payments.
The Requirements for Refinancing a Mortgage
Typically, a minimum waiting period or seasoning requirement is 6 months from when a home is purchased, or a previous refinance is completed. This requirement protects lenders from borrowers who may default on their loan soon after taking it out. If you are interested in refinancing your home loan before the seasoning requirement, you should communicate with your lender to see if they have any flexibility. Some lenders may be willing to work with you, while others may have stricter requirements.
Beyond that, these are also requirements for refinancing a mortgage:
Your credit score matters because it's a good indicator of how likely you are to repay a loan. The better your credit score, the more favourable the interest rate and terms you'll be offered.
Most lenders require that you have at least two years of consistent employment. This requirement ensures a steady income to make your monthly mortgage payments.
Your debt-to-income ratio (DTI) is the percentage of your monthly income that goes towards paying debts. Lenders use this ratio to evaluate your ability to make monthly mortgage payments.
Sufficient Home Equity
Home equity refers to the portion of your home's current appraised value or the part of the purchase price you have paid, whichever is less. To qualify for a home equity loan, the value of your home must be greater than the amount of your mortgage by 3% to 20%. You must meet the minimum equity requirements the lender sets to take out a loan.
Should You Refinance Your Mortgage?
Refinancing your mortgage is a decision that you must carefully consider. You need to consider several factors when making this decision, including your current financial situation, future goals, and risk tolerance.
You should only refinance your mortgage if it saves you money in the long run. This means you need to consider the costs of refinancing, including closing costs and the terms of your new loan. You also need to make sure that you will be able to afford the new monthly payment. If you are unsure whether refinancing is right, speak with a financial advisor to know your options.
Refinancing a mortgage is a decision that you must carefully consider. You must consider several factors when making this decision, so you must weigh your options wisely. All that matters is that you carefully think about your options to save more money.
If you’re looking for a refinance mortgage broker in Sydney, Wealthy You can help! Our brokers understand your circumstances, so we’re here to accommodate you to help you make mortgage repayments easier. Reach out today and allow us to help you!