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Blog Author: 
Nerd Wallet

You may feel now’s the right time to refinance your mortgage loan. However, this isn’t a decision to take lightly. Refinancing is an excellent way to lower your mortgage payment and save money, but it’s not the right choice for everyone. So you shouldn’t feel pressured or bullied into refinancing your home. It’s important that you first understand how the process works. Like most people, you might have a bunch of questions. If you’re not sure whether refinancing is the right choice for you, here are six frequently asked questions about refinancing. If you understand the process, you can make an informed decision. What is a mortgage refinance? A mortgage refinancing doesn’t just modify or adjust existing loan terms, a refinancing creates an entirely new mortgage loan. The new loan replaces the old loan. You receive a new, and often better interest rate, a new monthly payment, and refinancing can create a fresh 30-year term. There’s also the option of refinancing for 15 or 20 years. What’s the purpose of refinancing? Homeowners don’t refinance for one particular reason, rather there are several reasons to seek a new mortgage loan. Some people refinance to take advantage of lower interest rates and reduce their monthly payments, and others refinance to convert their adjustable-rate mortgage to a fixed rate. Also, depending on the amount of equity in your home, you can choose a cash-out to refinance and borrow cash from your equity. How much equity do I need to refinance? The amount of equity you need to refinance depends on the type of loan and the lender. For conventional mortgage loans, many lenders require at least 20 percent equity, although some banks have relaxed their standards and now only require five percent equity. If you refinance to an FHA home loan, you only need three percent equity. How much does it cost to refinance? Unfortunately, refinancing isn’t without costs. You will pay closing costs, which can range from two percent to five percent of the mortgage balance. If you can’t afford closing costs, some lenders waive these fees in exchange for charging a higher interest rate, or you can include closing costs in the mortgage balance. The latter option increases the total amount you owe on the property. Do I need good credit to refinance? Because refinancing creates a new mortgage loan, there’s an approval process. You have to complete a new mortgage application, and the lender will check your credit and income. Bad credit can prevent a refinancing, especially since many conventional lenders now require higher credit scores for mortgage loans. If you can’t meet a conventional lender’s requirements, you may be able to refinance with an FHA home loan. Most banks only require a credit score of 620 for an FHA home loan. Do I have to refinance with my current lender? There’s no rule that says you have to refinance with your current lender, although there are benefits to working with your present mortgage company. They know your payment history, and if you’ve been a loyal customer, they might offer the best rate and waive some of the closing costs to retain you as a customer. However, it’s always financially beneficial to compare mortgage loan quotes with at least two other banks to ensure you’re getting the best rate. A mortgage refinancing can be the solution if you’re struggling with high monthly payments and you need to take advantage of a lower rate; but unfortunately, refinancing isn’t cheap and you have to re-qualify for a home loan. If you can’t refinance, ask your mortgage lender about other provisions. You may meet the requirements for a mortgage modification, where the bank adjusts your interest rate and monthly payments without refinancing.  

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