What You Need to Know Before You Refinance Your Mortgage
Refinancing a mortgage is an excellent alternative for individuals looking to save money by taking advantage of low interest rates and monthly mortgage repayments. It also helps people draw from their home's equity and repay their mortgage sooner.
While refinancing a mortgage loan has several advantages, individuals need to consider a couple of factors to ensure they make the right financial decision.
Here is what you need to know before refinancing your mortgage loan.
Refinancing Your Mortgage May Be Difficult If Your Home Has a Negative Equity
One of the critical factors one needs to consider before refinancing their mortgage loan is their home equity. Among the main things online lenders in the Philippines look at when refinancing a mortgage loan is the borrower's home equity.
If the individual's home equity is lower than when they first took a mortgage, it can be challenging to refinance their mortgage loan.
This is because the lender may require the borrower to bring in money to compensate for the difference between the home's value when the individual initially took the mortgage and the house's current value. Unfortunately, most borrowers may be unable to come up with that lump sum amount.
Individuals must keep tabs on their home equity before refinancing their mortgage loans.
Your Credit Score Matters
Refinancing a mortgage loan means swapping an existing home loan with another loan from a different lender. And since this is an entirely different loan from another lender, they will follow the standard process to determine whether or not the borrower qualifies to receive a loan.
As expected, this process includes checking whether the individual has a good credit score. Of course, each loan company has set a particular score range that they consider to be good credit scores.
So, apart from ensuring that they have a good credit score, individuals need to research and find a lender who offers online loans to people with credit scores.
Your Debt-to-Income Ratio Also Matters
Again, refinancing a mortgage loan means taking another loan in place of the current mortgage. And since that particular loan is just like all other online loans, loaning companies will take standard steps to determine whether or not the borrower qualifies to receive the loan.
One of these steps includes checking one's debt-to-income ratio. An individual's debt-to-income ratio is the total amount of money in debts against the amount of money they earn in a month(before they pay their taxes.)
A high debt-to-income ratio shows that an individual has many online loans to repay. So, lenders may not be confident that the borrower will be able to repay the loan. Fortunately, there are many ways to reduce one's debt-to-income ratio. Among them are increasing monthly loan repayments and avoiding other online loans.
Consider the Additional Costs of the New Loan
Another essential factor individuals need to consider when refinancing their mortgage loans in the Philippines is the extra costs of the new loan.
Like other online loans, lenders charge borrowers additional fees (apart from the interest) when they receive the loan. But what about loan companies that offer a “no-cost” refinance loan? While some lenders offer this type of refinance loan, borrowers will end up paying high-interest rates.
In general, people should research and find a lender who offers loans with low extra fees.
There Are Several Types of Refinance Loans
A refinance loan isn't just one general loan. Several types of refinance loans are available, so individuals need to explore them to determine which is the perfect one for them.
The most common type of refinance loan is the rate-and-term refinance loan. Also known as a regular refinance, this is a new loan an individual takes out to replace their mortgage. So, the new loan will have a different repayment period, interest rates, and costs.
With rate-and-term refinance loans, borrowers need a good credit score, a low debt-to-income ratio, and a good amount of equity on their homes.
Another type of refinance loan is the cash-out refinance loan. Individuals may need to take a larger loan than their current outstanding mortgage with this loan. That way, they can receive the extra cash after clearing their mortgage.
Cash-out refinance loans are ideal for borrowers with a good amount of home equity. Usually, loan companies won't give an individual a loan amount that is more than the value of their home.
So, if an individual has paid a good amount of their mortgage, they stand a chance to receive a good amount of the surplus cash.
Other types of refinance loans include a cash-in refinance loan that allows individuals to use the loan to repay part of their mortgage. Then there's the no-closing-cost refinance.
This loan allows borrowers with negative home equity to take out a new loan without paying the closing cost to cover the difference between their home's value when they first took out a mortgage and their current home's value.
While these individuals may not initially pay the closing cost, they are bound to pay it during their loan repayment period.
While refinancing does come through for many people financially, it's essential to consider all the possible factors because they still will be taking out a loan at the end of the day.