Housing costs typically take up the largest percentage of a consumer’s monthly income. During periods of financial hardship, managing mortgage payments can be overwhelming for households, and many seek out ways to lower their monthly payment obligations. One of the most common methods individuals use to reduce their housing expenditure is refinancing their mortgage.
Refinancing allows homeowners to replace their existing mortgage with a new home loan, the latter of which offers better or more affordable terms. For example, consumers may extend the term of their loan, which results in lower monthly payments. This option, however, will result in owners paying more interest over the life of their loan. In addition, homeowners may choose to refinance their loan to a lower mortgage rate. Current rates have fallen to historic lows and the Federal Reserve Board has pledged to keep rates low through 2014, and possibly 2016.
There are several steps individuals will need to take in order to refinance their current mortgage.
First, individuals will need to have a strong credit score. Refinancing a loan is similar to applying for a brand new mortgage, and lenders will take an individual’s credit standing into account before extending financing. Lenders have different score requirements when it comes to extending loans, so it’s important to shop around for the right bank. To secure the best interest rates, consumers may need a credit score in the 740 range or above, according to HSH.com. For this reason, it’s important for households to ensure that they are caught up on all their bills.
It can also be helpful for individuals to pay off credit card debt to show lenders that they are in good financial standing. Debt can hinder an individual’s credit score and make it more difficult for them to put money in savings. Consumers who want to refinance their mortgages may need savings to cover closing costs, fees and other expenses that come with undergoing the process.
Lastly, there are several refinance options to choose from. Homeowners who are trying to improve their finances should consider working with a housing counselor to choose the agreement that complements their goals. Counselors can also help individuals navigate the paperwork requirements and application criteria. Similar to applying for a first home loan, it’s important to start planning for a refinance months in advance to have enough time to clean up credit and save money.