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;
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.