Home Refinancing Tips

Refinancing involves paying off your existing mortgage and creating a new one. You can also decide to combine both a primary mortgage and a second mortgage into one new mortgage with a lower payment than both loans combined. Refinancing may remind you of what you went through in obtaining your original mortgage, since you may encounter many of the same procedures and the same types of costs.

Borrowers should consider refinancing to accomplish any of the following;

  • Lowering your interest rate. Market rates may have decreased or your credit score may have increased which entitles you to a lower interest rate. Lower interest rates not only provide a lower mortgage payment but generally result in a faster build up of equity in the home.
  • Increasing or decreasing the length of the mortgage. For example converting from a 15 year term to a 30 year term. A longer term reduces the monthly payment while a shorter term increases the monthly mortgage payment.
  • Converting from an adjustable rate mortgage to a fixed rate mortgage or vice versa.
  • Obtaining cash from the existing equity in your home. This is called a cash out refinance. If a borrower is struggling with high monthly payments from revolving credit card debt, they can consider a cash out refinance to roll the credit card balances into the mortgage balance and eliminate the high monthly debt burden.  Some of the savings can then be reinvested into the mortgage to payoff the mortgage in a shorter timeframe.
  • To eliminate escrow shortages that are inflating monthly mortgage payments. Increases in the value of your property usually results in higher property taxes that will translate to higher escrow payments that inflates your mortgage payments. Also, events such as natural disasters may cause homeowner insurance rates to increase therefore increasing escrow payments and inflating monthly mortgage payments.  These situations result in escrow account shortages that can be eliminated by refinancing.

Refinancing Eligibility

Determining your eligibility for refinancing is similar to the approval process that you went through when obtaining the original mortgage. Lenders will consider your income and assets, credit score, other debts, the current value of the property, and the amount of the new proposed mortgage.  If your credit score has improved, you may be able to get a loan at a lower rate. On the other hand, if your credit score is lower now than when you got your current mortgage, you may have to pay a higher interest rate on a new loan.  This may potentially negate some of the benefits of refinancing.

Lenders will require an appraisal to determine the value of the home and look at the amount of the loan you are requesting in order to determine the loan to value or LTV ratio.  If home prices fall, your home may not be worth as much as you owe on the mortgage and this may prevent you from refinancing.  There are different ratio requirements for a rate and term refinance as opposed to a cash out refinance.  Cash out refinances may also have higher interest rates.  If the loan to value does not fall within lending guidelines, you may not be able to refinance or may obtain refinancing terms that are less-favorable than what you already have. 

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