Refinancing a home involves taking the current mortgage note, fees or liens on the home and lowering the interest rate on the entire balance. Refinancing can also be done on personal loans and car loans. Borrowers refinance to lower their monthly payment and make their house or loan payment more affordable. Refinancing can also involve lowering the interest rate and borrowing money against the home with a home equity loan or second mortgage loan. Before refinancing your existing mortgage or account there are some rules to consider.
Credit Score
Your credit must be in good standing to qualify for a new loan or lower interest rate. Credit scores are based on your FICO score. Your FICO score is based on a combined score from all three credit reporting agencies---Experian, TransUnion and Equifax. Revolving credit accounts such as department store credit cards and national credit cards are considered on most credit reports. Revolving accounts generally require a monthly payment on a timely basis to pay off the balance. Reports to the credit agencies occur when the payment is 30 days or more past due. If the payments are on time, the account will remain in good standing on the report. If you carry high balances on the accounts and do not pay the balance off in full each month, the score will lower. Car loans, student loans and personal bank loans also show up on credit reports. Timely payments and low balances will make the score go up. Lenders also look at large scale credit lines and accounts such as house payments and vehicle payments first to see if they are in good standing and have remained so for the past 6 to 12 months.
Property Appraisal
A property appraisal is essential when refinancing your home or loan. Many refinancing loans go by a percentage of what the home is worth through an appraisal an offer to refinance a loan for 80 to 125 percent of the home's value. If your home is worth $100,000 and you owe $80,000 you can get refinanced for the lower interest rate on the $80,000. In some cases you can borrow at the low interest rate on the remaining 20 percent and get cash back.
Income
Your income plays an important role in whether you can refinance to a lower interest rate. A lender measures credit worthiness based on your income, how much debt you have and how well you pay off that debt. This is called debt to income ratio. The higher your credit account balances, the higher your income should be so you can prove that you will be able to meet that financial obligation. If you are overloaded with credit card debt and your income can not support that debt along with your day to day living expenses, your score will lower and you will not be a good candidate for refinancing.
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