Borrowers look out to refinance their home depending upon the market conditions or to meet other financial needs. One of the most common reasons to refinance is a lower rate of interest. Taking advantage of a lower interest rate to reduce the overall mortgage cost is never a bad idea.
But as a borrower, before you begin with the process, it is essential to know the pros and cons of refinancing a home loan. Let’s explore those dimensions.
Pros of refinancing the mortgage loan
- The lower rate of interest
The most compelling reason to refinance the mortgage is to reduce the overall cost and interest rate. If the rates have dropped from the original mortgage interest rate, pursing the refinance is not a bad idea. The critical elements such as the credit score, debt to income ratio, or the income should be improved or constant. The term does get reduced along with the lower interest rate.
A borrower gets a chance to convert an adjustable interest rate into a fixed interest rate. It eliminates the risk of paying higher interest rates in case the market rates increase. Another benefit is, you could convert the jumbo loan, which carries a high-interest rate, to a Conventional loan.
- The lower monthly payments
Home loan refinancing allows you to lower your monthly payments by increasing the loan term. Also, if you refinance your mortgage for lower interest, you monthly payment will reduce naturally. However, if you increase the loan term, the borrowing cost of the loan will be higher.
- The game of predictability
First of all, if you already have a fixed rate, then predictability is not a concern. The escrow may have a variation, but the principal mortgage and interest rate will remain the same. However, adjustable-rate has a predictability issue. It would be wise to convert it into a fixed-rate loan. With fixed-rates, borrowers know their monthly payments towards the mortgage and can adjust their budget accordingly.
- Tapping into Equity
If you plan to refinance because of the lower interest rate, a cash-out would be a good idea. A cash-out refinance is based on the home value depending upon the market situation. It is better than getting a credit card or personal loan.
You could consolidate high-interest rate debt, finance home improvements, pay the student loan or college bill, or settle the massive medical bill.
When you see all the benefits, it is likely that you would decide to refinance your mortgage loan. However, first, let’s dwell on the cons of refinance.
Cons of refinance
Mortgage refinance is not a risk if that’s what you are thinking. But there are potential drawbacks to it. Let’s explore them.
The tedious application process
The refinance process is not a walk in the park, as you might think. Remember the first time you needed the mortgage, how you had to do the research, getting the documents in order, the lender verifying the income, employment, and identity.
It takes time without any guarantee of getting the deal. For weeks, you are not sure unless the lender informs you. If you are ready to face everything again, only then opt for the refinance.
You may or may not get the approval.
If you own a home, it does not give a guarantee that you can refinance it. It is mainly due to the borrower’s weaker profile. Your application for mortgage refinance may be declined due to lower income or credit score. A high debt to income ratio could be another reason for the application rejection.
The monthly payment could increase.
If your objective is to reduce your loan term or get cash, you would end up paying higher monthly payment that can put strain on your pocket. The increased payment will mess the monthly expenses if you have other obligations like an insurance payment, medical expenses, etc. So, calculating would be a good idea.
Apart from these pros and cons, you would have other personal reasons for whether to opt for a refinance or not. Now as you have explored it, knowing the minimum qualification would be a good idea. The requirements will vary from lender to lender.
- The minimum credit score required is 620.
- The outstanding and judgments should be repaid before closing the deal.
- For Chapter 13 bankruptcy, there is a 2-year minimum waiting, and for chapter 7 bankruptcy, it is a four-year minimum waiting.
The required basic documents
- Pay stubs for the past 2-3 months
- Tax returns
- W-2s and 1099s
- Credit report
- Assets statement
- Outstanding debt statement
You must analyze the pros and cons of a mortgage refinance before you begin with it. If you are going to get significant benefits from it go for it in terms of interest rates, flexible tenure, cash-out refinance, etc. Whereas if the benefits are marginal, it may not worth refinancing a home loan.
