What Is Home Refinance?
- Refinancing is the term used when homeowners apply for a new mortgage loan to replace their current mortgage loan. Owners choose a mortgage lender, complete a mortgage application, supply the necessary documentations and wait for lenders to review their information. If approved for a refinancing, funds from the new mortgage loan pay off the original loan, and borrowers start making loan payments to their new lender.
- The objective for a home refinance varies for each property owner. Dropping rates prompt many to refinance their mortgage loan. This is because acquiring a cheaper interest rate on the loan often drops the monthly payment. This works well for borrowers who pay a high mortgage rate and for those who need a lower payment to keep their mortgage affordable. Other reasons to refinance a home include acquiring a fixed-rate mortgage, eliminating mortgage insurance or reducing the term on a home loan.
- Like other loans, home refinancing entails qualifying or being eligible for financing. As previously discussed, lenders review refinancing applications and documentations submitted by owners. They also review credit scores and history to assess eligibility. Factors that disqualify an applicant can include a low credit score, recent bankruptcy, history of late payments and other credit issues such as repossessions and collection accounts. A good minimum credit score range for refinancing a home is between 680 and 740.
- Refinancing a home is not without disadvantages. Mortgage lenders provide a host of services when preparing a refinance such as originating the loan and processing the paperwork; plus there are other mortgage-related services like a title search, credit check and home appraisal. Because these services aren't free, owners have to pay these expenses at closing. Typical closing costs on a home refinance are between 3 and 6 percent of the loan balance.