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Mortgage payments are something that is with you for the long run, paying down the total of your home. When you run into trouble paying them or are looking for a way to reduce your monthly payments, you could consider refinancing.
One form of refinancing will alter your rate and your term, allowing you to stretch out your payments and reduce your rate so that you pay less each month.
A Look at Rate and Term Refinancing
When you look into refinancing your rate and your term, you’re basically redoing your initial loan structure. You’ll have the option to pay over a longer period of time and also reduce the rate so that you can pay less each month. On the other side of things, you could restructure your loan to reduce the time to pay, which would reduce the total interest you pay.
Should you Consider a Rate and Term Refinance?
There are a number of reasons why a rate and term refinance could be beneficial for you. If you’re considering rate and term refinancing, here are some things to consider.
You can lower your rate
One of the main reasons why homeowners attempt to refinance their home is because their rate is high and drives up their payment. Over time, they wind up paying much more on interest and taking longer to pay their loan off.
Refinancing is there to lower your payment, not only tackling the percentage but cutting down the amount that you’ll have to pay each month. That not only puts money in your pocket now but significantly increases the savings you’ll have year after year. Buying a home is a big purchase, one that takes years to pay off.
Because you’re financing less overall, you can reduce your term. That means that you could pay one year less or more, reducing the time you pay on your home and paying your home off faster.
Qualifying for rate and term refinance
Rate and term refinancing is just like any other refinancing, you have to qualify. Whether or not you qualify depends on a few things, including your credit score, home equity, and debt-to-income (DTI) ratio.
Most lenders only approve refinancing for homebuyers that have a score of 620 and above. To qualify for a rate and term refinance, you need a strong credit score and proof that you’re a good candidate for a loan.
Lenders will also look at the amount that you’ve paid on your home and determine how much equity you have in your home. The more valuable your home and the less you own, the more equity, which means sweeter refinancing ops for you.
Debt-to-income (DTI) ratio
The number of debts that you owe apart from your home is also considered. To qualify for a rate and term refinance, you need to have a low DTI ratio. Most lenders want to see below 50%, knowing that you have enough money to pay your bills and have some money to set aside in case of an emergency.
When a lender determines whether or not you qualify, they will also take a look at your closing costs. These often take homeowners by surprise, as they factor in and account for 2% to 5% of the total amount of your loan. In most cases, refinancing is a good option while in others, it may be better to pay the home off.
Tackle your Mortgage
When you have a home loan, you might want to take all the steps you can to pay it down faster. Refinancing can help, reducing your rate and term, meaning that you pay less over time. Refinancing can provide relief to those who are weighed down by their monthly payment and help speed up the process for those who want to pay their home off.
If you’re looking for a lower rate and/or term, refinancing could be an option for you. Check to see if you qualify and start taking steps to become a more attractive applicant for lenders to accept your application. It will make all the difference over the years and mean that you will pay less to finally own your home.