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The 4 Most Common Refinancing Problems

Homeowners choose to refinance their loan when they want to adjust aspects of their loan. The most financially wise reasons to refinance a mortgage are: to reduce the interest rate, decrease the term of the mortgage, and change the type of loan.

Reducing the interest rate is one of the greatest incentives to refinance. If, through refinancing, the homeowner is able to lower their interest rate by 1% or 2%, the savings are worth the money needed to refinance. A lower interest rate enables the homeowner to grow their home equity at a faster rate and reduce monthly payments.

Decreasing the term of the mortgage is another factor causing people to refinance their loan. Typically, a homeowner is going to be able to refinance the loan to have a shorter mortgage term but with higher monthly payments. However, if done when the interest rates are low, a homeowner may be able to find a new loan that has similar monthly payments but a much shorter loan term.

Changing the type of loan occurs in a refinance when a homeowner wants to switch between an adjustable-rate mortgage and a fixed-rate mortgage. Some people prefer an adjustable-rate mortgage because the interest rate typically starts lower than that of a fixed-rate mortgage. If the homeowner purchases a home in a period where interest rates are falling, this could enable them to pay off the loan faster. Others prefer fixed-rate mortgages because although the initial interest rate may start higher than the adjustable-rate interest, it will remain consistent throughout time. This means the homeowner will not have to worry about interest rate changes.

No matter the reason for refinancing, it is important to really consider whether refinancing a loan is your best option. In the refinancing process, there are fees and costs that are going to add up quickly. Here are the 4 most common refinancing problems homeowners have:

  1. Unemployment. The process of refinancing a loan is very similar to when a person first applies for a loan. The homeowner has to qualify for a loan through providing information about their employment, income, and credit. In refinancing, the homeowner is going to have to prove that they have the funds available to make their monthly payments. If the homeowner does not have a job, refinancing is going to be very difficult. He or she will need to try to find a new job as quickly as they can. The longer they wait, the harder it will be and the more that will need to be explained. A lender is going to want to talk to your previous employers to understand why you are having difficulty maintaining a stable job.
  2. An unstable career. A lender wants the homeowner to have a stable job. This means not only do they want the homeowner to be receiving a good income, they also want the homeowner to have worked in the same field for a substantial amount of time. It is not necessarily frowned upon if the homeowner has switched jobs recently as long as the job switch was done within the same field and the pay was not lessened. It is best if the homeowner has worked in the same field for at least two years. If he or she is looking to switch jobs, try to wait until the refinancing is complete. If the homeowner cannot wait, they will need to have an explanation prepared as to why they switched jobs and how that will impact their financial situation. Try to provide the lender with examples of financial responsibility. They are only making sure you are prepared for the changes that come with refinancing a loan.
  3. No cash. If are looking to refinance, a homeowner is going to need a cash reserve. Extra cash is going to give the lender the assurance that even if the homeowner goes through a period of financial instability, they will have extra cash to cover the time of instability. The larger your loan, the more cash you are going to be expected to have. You are expected to have several months worth of cash available. The cash reserve needs to be in the homeowners bank account a few months before they seek to refinance. Therefore, the money could not have been gifted to the homeowner for the occasion of refinancing.
  4. Plummeting equity. The homeowner has to have a home that has a substantial amount of equity. Equity is determined by subtracting the amount of money you owe for the home from the value of the home. If the value of the home is less than the loan, refinancing is going to be almost impossible. In this situation, a homeowner is faced with either having to wait until the equity of the house grows or purchase equity for their home. If the homeowner does not want to wait or pay for more equity, a last option is for the homeowner to pay higher private mortgage insurance or pay a high interest rate.

If a homeowner is going to refinance their loan, they need to be sure that they are prepared. If any of these 4 most common refinancing problems applies to you, refinancing may not be your best option. Refinancing can be a way to decrease debt and pay off the loan quicker, but it can also turn into increasing the debt and lengthening the time it will take to pay off the loan. Be wise in your decision-making. Carefully consider whether refinancing is going to help or hurt your financial situation.

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