The low interest rates currently available make refinancing an easy and attractive option for homeowners hoping to lower their monthly mortgage payments, pay off their mortgages sooner or a combination of both. Refinancing with a home equity loan is a little more complicated, but it is possible.
1. Determine What You Want to Refinance
First of all, homeowners should determine if they want to refinance just their home equity loan, just their primary mortgage or both. While one loan may already have a favorable interest rate, there are other factors to consider. Refinancing just the primary mortgage automatically makes the home equity loan a lien on the property. Furthermore, refinancing just the original loan without refinancing the home equity loan usually requires lenders to agree to a subordination agreement. Refinancing just the equity loan should be a pretty simple refinancing process. However, refinancing both together into one new loan has the advantage of combining two monthly payments into one.
2. Determine Which Refinancing Method You Prefer
There are two common ways to refinance a loan: a cash-out refinance and a rate-and-term refinance. With a cash-out refinance, homeowners take out an entirely new loan, which they use to completely pay off their existing loan or loans. This type of refinance is best when increasing home values make it difficult for homeowners to refinance. Rate-and-term refinances are simple refinances designed to change a loan’s rate and terms. They are best in situations where current interest rates have dropped significantly.
3. Determine if Refinancing Will Save You the Most Money
The two most common reasons to refinance are to receive a better interest rate and to obtain better loan terms. A lower interest rate may not always save homeowners money, however. If homeowners decide to refinance both their primary mortgage and their home equity loan into one new loan and the new loan leaves them with less than 20 percent equity in their home, they will have to pay primary mortgage insurance, which can cancel out any benefits received from a lowered interest rate. Furthermore, refinancing costs money as homeowners must pay closing costs and fees again. Homeowners should consider if they plan on living in the home long enough to recoup their costs and make refinancing worth it.
In situations such as adjustable-rate mortgages and balloon mortgages, where payments are likely to increase significantly in the near future, and in situations where interest rates have significantly lowered since the homeowners originally obtained the loan, refinancing can be a smart financial move.
4. Establish a Good Credit Score First
There are times when refinancing will not improve homeowners’ interest rates. The interest rates homeowners receive are determined in large part by their credit scores. Homeowners wanting to refinance at a better rate should make sure their credit scores are in good to excellent shape before they try to refinance. This will be tremendously helpful in being approved for a new loan and in receiving a good interest rate.
5. Shop Around
Just like with any new loan, it is in homeowners’ best interest to shop around for the best interest rates and loan terms. Rates and terms can vary considerably among lenders. Staying with the same lender can be advantageous in that the lender will already have homeowners’ paperwork and records on file and the lender may be willing to give more favorable terms to homeowners whose business they want to keep. Switching lenders can also be advantageous if other lenders offer better rates and terms or if homeowners have had any problems with their current mortgage lender.