Sometimes as humans, all we need is a second chance, especially if our current plans are not going as we planned. A life-saving boat will simply be a dire need. Alas, this is what rate and term refinance is to you as a home buyer and your mortgage. It is a lifesaver. And if done well, it can significantly mitigate your monthly mortgage payment. In this article, you will learn how the rate and term refinance works, what it entails, as well as how you can apply for one to live in that home of your dreams without worries.
What is a Rate and Term Refinance?
A rate and term refinance helps you move to a loan term that is preferable to the current one you are working with. Basically, what this type of refinancing does is to help you modify the details of your present mortgage, particularly the term of the loan as well as its interest rate. Thus, this refinancing allows you less or more time to pay off your loan as fitting for you. It also helps you to benefit from lower rates in the market.
How Does a Rate and Term Refinance Work?
Loan rates in the market go up and down. And if you took your loan at a time when the rates were high, this type of refinancing helps you to get a new loan with the current lower rates. Thus, with this new loan, you can pay off your former mortgage.
At the basics of it, rate and term refinance exists to help home buyers switch and exchange from a current loan arrangement to a more favorable one. Thus, you can change the terms of your present loan to leverage lower interest rates as well as a more convenient monthly payment.
Requirements for Applying for a Rate and Term Refinance
If you want to refinance your mortgage loan’s terms and rates, here are some of the necessary things you must have:
- Debt-To-Income Ratio (DTI): Most lenders require that you have at least a DTI of 50% or lower before you make applications for rate and term refinance.
- Great Credit Score: When applying for any type of mortgage, your credit score is always one of the major criteria that lenders consider. It is the same for this type of refinancing as well. Lenders require you to have a credit score of at least 620 to qualify for rate and term refinance.
- Home Equity: The idea of home equity is the amount of the loan principal that you have settled and paid off. It is most advisable to have at least 20% equity in your home before you apply for a refinance.
How to Apply for a Rate and Term Refinance
Applying for this refinance type is akin to making applications for a first mortgage loan. All it takes is tendering your mortgage application to your lender with other necessary financial documents (two most recent pay stubs, two most recent bank statements, and two most recent W-2s). But first, make sure you have done your initial research for lenders around you. And once you find one, make sure you specify that you are applying for a refinance.
After all the important filings and applications, your lender will then set up an underwriting. After this is when the appraisal and closing meeting come in.
The rate and term refinance can be a tremendous benefit to you. As a second chance, it avails you of the opportunity to re-strategize your loan payment. So, are you a homeowner and do you know this is right for you at the moment? Then, you should apply for one today.