When you refinance your mortgage, you are essentially paying off your existing mortgage and are creating a new mortgage. Reasons vary as to why you might want to do this. Maybe interest rates are lower. If you qualify, you may get a lower-interest rate. Maybe you are having difficulty paying your current mortgage and want to change the terms to get a lower monthly payment. Some situations are more difficult than others are when it comes to refinancing your mortgage.
You must qualify in order to refinance your house to get a lower interest rate. You typically need an 80 percent loan-to-value, also known as LTV, ratio, according to Bankrate.com. You can use the mortgage LTV calculator on the Bankrate.com website to give you an idea by entering the current appraised value of your home and your outstanding balance. If you have a home equity loan, home equity line or liens on the property, you enter that information, too. If you qualify for certain government programs, you may be eligible for a more lenient LTV rate. Veterans may qualify for 100 percent.
Your credit score comes into play when you are trying to refinance to get a lower interest rate. Generally, if your score is 740 and higher, you will probably get the best rates. If your score is 680 and higher, you can probably still qualify for a refinance, but the terms will not be as good, according to Bankrate.com.
To make the process easier for you, gather your last few pay stubs to prove your income and your income tax returns. Make a list of your monthly debt load, write down the amount you have in savings and request a copy of your credit report by contacting AnnualCreditReport.com.
Refinancing costs about 3 to 6 percent of your outstanding principal in fees. Typical fees you pay are an application fee, a loan origination fee, points, an appraisal fee, an inspection fee and a closing fee. If you have a loan insured by the federal government, you could pay fees particular to the type of loan you have. If you borrow more than 80 percent of the value of the property, you pay private mortgage insurance as well.
If you are having financial difficulties and cannot make your mortgage payment anymore, you may qualify for the Making Home Affordable program. If you are eligible, you can modify your mortgage to make it more affordable for you. If your mortgage is through Fannie Mae or Freddie Mac and you have not been more than 30 days late on your mortgage payment within the 12 months prior to applying, you may qualify for refinancing under this program.