Are you having trouble keeping up with your monthly mortgage payments? Are you looking to decrease the payment or the overall interest rate of your mortgage?
If you answered “yes” to either of these questions, keep reading.
We’re going to tell you everything you need to know about something that could save you and your bank account: a rate and term refinance. By looking through its pros and cons, you’ll be able to decide if a rate and term refinance is the right choice for you.
What Is a Rate and Term Refinance?
A rate and term refinance is a method of mortgage-adjustment that allows you to change the terms of the agreement on your mortgage. In other words, a rate and term refinance can help you make your mortgage more favorable for you.
Basically, a rate and term refinance involves getting a second loan for your mortgage. Before you start getting worried, let us clarify.
You are taking out a second loan so that you can pay off the first. Then, you’ll make payments on the second loan rather than the first.
This strategy can help you reduce your mortgage payment, lower your interest rate, and/or change your term length.
Keep in mind that the point of a rate and term refinance is to help you rather than hurt you. The terms of refinancing should not be more rigorous than your initial terms.
Am I Eligible for a Rate and Term Refinance?
If you’re looking to get a rate and term refinance, there are a few requirements that you need to meet.
Firstly, you need to have an adequate credit score. When we say this, we don’t mean that you need to be perfect. However, we do recommend that anyone applying for a rate and term refinance program have a credit score of at least 620.
The requirement will vary depending on the loaner that you’re working with. Be sure to do your research before applying with anyone.
Secondly, you should have at least 20% of your home paid off. This gives you home equity that proves that you can make payments.
You could apply with a lower percentage paid off, but we don’t recommend this. It could lead to extremely high interest rates that wouldn’t serve to help you save money.
Thirdly, your debt-to-income ratio should be less than 50%. If it’s any higher, you’re not likely to get approved. If you do, you likely won’t get a good interest rate.
To lower your debt-to-income ratio, make sure that you’re paying off any existing loans you have as well as wiping your credit cards and other credit accounts free of debt.
Lastly, you’ll need to be able to pay for closing costs. These are usually two to three percent of the loan value and are due up-front.
You may be able to roll these costs into your loan, but we don’t recommend this as it could be a red flag to the lenders.
What Are the Pros of a Rate and Term Refinance?
There are several advantages of a rate and term refinance. Here are a few of our favorites:
- You can most likely get a lower interest rate on your mortgage than what you’re currently paying
- You can shorten the term of your loan and get your mortgage paid off faster
- You may be able to pull cash out of the equity you already own
Overall, a rate and term refinance is extremely helpful for home owners that use it correctly. When used responsibly, a rate and term refinance can save you money and improve your financial health.
What Are the Cons of a Rate and Term Refinance?
Rate and term refinancing isn’t the right choice for everyone. In fact, there are a few disadvantages to consider before you apply for a rate and term refinance:
- You may not save as much as you’re wanting to save
- You may get an interest rate that isn’t much lower than the one you currently have
- You’ll spend a lot of time on the process of getting a rate and term refinance
- You may pay more in fees than you’re getting back by refinancing
If any of these disadvantages are worrisome, you should consider looking around at different offers. Different lenders have different requirements.
Don’t assume that all lenders are the same. You might just have to shop around a little before you find the refinancing deal for you.
How Do I Apply for a Rate and Term Refinance?
The application process for a rate and term refinance is similar to the application process that you went through when you applied for the first mortgage.
First, you’ll submit an application for the loan and the required financial documentation to a lender. From there, the lender will schedule the underwriting, appraisal, and closing meeting.
If you are approved, your lender will send you a Closing Disclosure. This document contains important information about the lender’s offer. This includes the principal balance, interest rate, and monthly payment.
You should take this time to read through the document carefully and make sure that you agree with all of the terms that are outlined in the document.
If you’re looking to save money, you should double-check that the monthly payment that the refinancing loaner is offering you is less than your current monthly payment. Compare interest rates as well.
Where Can I Get a Rate and Term Refinance?
After hearing about all of the ways that a rate and term refinance can help you, we’re sure that you’re excited to apply for one. Again, before moving forward, we urge you to evaluate your financial situation and look at what different lenders are offering.
If you’ve decided to apply for a rate and term refinance, we urge you to consider applying with us. Our team here at Supreme Lending is devoted to helping you get the best term for your financial situation.
We can work with you to find the best terms available on the market right now. Contact us today to get started.