The idea of refinancing a mortgage can be a tantalizing option for many Americans, especially as their financial situations evolve.
Lendstart asked borrowers in a poll what their main motivations for a mortgage refinance were, and many answers pertained to spending less money on their mortgages. The most common answers included lowering interest rates, consolidating high-interest debt, eliminating private mortgage insurance, and prolonging the loan.
However, some of the responses Lendstart received varied depending on the individual’s credit score as, in some cases, a person’s credit score can impact their financial situation. Here’s what Lendstart learned from consumers looking to refinance.
Lowering the Interest Rate
Borrowers wanting to lower their interest rates was, by far, the top reason for refinancing their home at 45.50%, according to Lendstart’s survey. This was true across all types of credit scores, whether it was poor or excellent. This is how this answer broke down according to credit score:
- Excellent: 48%
- Very good: 51%
- Good: 39%
- Fair: 42%
- Poor: 53%
With the exception of those with good or fair credit scores, around half of the participants in each credit bracket chose to lower their interest rate. Roughly 40% of those with good or fair credit scores picked this as their option.
By lowering their interest rates, borrowers can not only cut down on how much they pay throughout the life of their home loan but can also reduce their monthly payments as well. In order to qualify for lower interest rates, consumers will typically need to have higher credit scores and a history of paying their bills on time in order to prove to the lender they will be able to repay.
To get approved for lower interest rates for a mortgage refinance, borrowers will want to work on their credit scores. They can do this by cutting down on their current debt as well as making sure they avoid any late payments.
Consolidating High-Interest Debt
Consolidating one’s high-interest loans was the second most popular reason Americans want to refinance their mortgage at 22.25%, according to Lendstart’s poll. This, however, excluded respondents with excellent credit scores. For many borrowers with excellent credit scores, this was the least popular answer.
Here’s how respondents in each credit bracket responded:
- Excellent: 12%
- Very good: 20%
- Good: 30%
- Fair: 27%
- Poor: 16%
Consolidating high-interest debts was most popular among those with good or fair credit, approximately 30% in both categories. After excellent credit scores, poor credit scores were the second least likely to claim this as a reason.
Using a mortgage refinance to pay off high-interest debt may be a good option for some homeowners, especially if they are approved for a low-interest home loan refinance. This money can be applied toward quickly paying off those high-interest loans, consolidating their debts, and helping consumers to focus on paying off their mortgage instead. This approach can ultimately save consumers money by cutting down on the amount of interest a borrower has to pay since many mortgage loans have much lower interest rates than many other types of debt and credit such as personal loans or credit cards.
Eliminating Mortgage Insurance
Wanting to eliminate mortgage insurance was the secondary purpose behind wanting to refinance only among respondents with excellent credit scores. Overall, 11.5% of respondents said this was the reason they would apply for a mortgage refinance. This is how respondents within each credit bracket responded:
- Excellent: 34%
- Very good: 13%
- Good: 11%
- Fair: 9%
- Poor: 4%
While less than 13% of those in most other credit brackets, particularly with those with poor credit scores, eliminating mortgage insurance was the answer for roughly one-third of those with excellent credit.Mortgage insurance typically applies to consumers who contribute less than 20% of a down payment toward the purchase of their home as well as those who get FHA and USDA loans. By purchasing mortgage insurance, the risk to the lender is lowered which may help some consumers qualify for home loans they might not have otherwise been approved for. On the downside, however, it may also increase the borrower’s overall costs. This is why some consumers may want to refinance — if the refinance offers them lower rates as well as the opportunity to lose the mortgage insurance, this could save some borrowers a lot of money.
Prolonging the Loan
Prolonging the home loan was the least popular reason to refinance a mortgage. Across all survey participants, only 10.25% chose this as an option, according to Lendstart’s poll. It was the most common among those with excellent, very good, and good credit. Prolonging the loan was extremely unpopular among those with fair and poor credit. Here’s how those who took the survey responded within each credit bracket:
- Excellent: 12%
- Very good: 11%
- Good: 10%
- Fair: 7%
- Poor: 4%
Prolonging a home loan might align best with those who are facing a tight budget or financial hardship and need to cut back on how much they spend on their monthly mortgage. For some borrowers, this could lower their monthly payments which might help some consumers better manage their finances.
A mortgage can be one of the biggest monthly expenses an individual or family can take on. Reducing that amount can make a big difference in some people’s budgets. However, as a downside, not only will those borrowers spend more time paying off their home, by stretching the loan out for even longer, borrowers may increase how much they end up paying overall for the life of the mortgage.
How Do Credit Scores Affect the Reasoning for Mortgage Refinancing?
Credit scores can have a large impact on a person’s financial position. Many lenders view credit scores as a means to evaluate an individual’s creditworthiness and helps the company weigh the risk of lending to the person. It can limit the type of credit a borrower can access and whether or not they even qualify for most types of credit. Credit scores also can determine the rates and terms an individual will receive if they are approved for a loan or other type of credit.
The same goes for getting a mortgage or refinancing a mortgage, and an individual’s credit score played a large role in their motivation for getting a mortgage refinance.
• Excellent: Nearly half — 48% — of those with excellent credit scores said the main reason for a mortgage refinance would be to lower interest rates, followed by roughly a third — 34% — who chose to refinance to eliminate mortgage insurance. Unlike the other credit brackets, however, the third most popular option among those with excellent credit was to move into a longer-term loan at 17%. The least popular option among those with excellent credit was to consolidate high interest debt at 12%.
• Very good: More than half (51%) of those with very good credit wanted to refinance in order to reduce their interest rates while a mere 20% wished to refinance to consolidate any debt they had with high interest. Eliminating mortgage insurance was the third choice among those with very good credit at 13%, with moving into a longer-term loan being the least popular at 11%.
• Good: Though it was still the most popular choice, those with good credit scores were the least likely to choose refinancing in order to lower their interest rates at 39% followed closely behind 30% of respondents stating they wanted to consolidate high-interest debt. The third and fourth choices, eliminating mortgage insurance and moving into a longer-term loan, were neck and neck at 11% and 10%, respectively.
• Fair: Individuals with fair credit leaned most heavily toward lowering their monthly interest rates at 42%. This was followed by 27% of those with fair credit scores choosing to refinance in order to consolidate debt with high interest. There’s a large drop in the fair credit bracket between the second and third options. Those that wish to eliminate mortgage insurance made up only 9% of respondents while the least popular option, lengthening the loan term, made up 7%.
• Poor: Those with poor credit scores were most likely to choose to refinance in order to lower their interest rates at 53%. For the other options, there was a large drop in popularity. Only 16% of respondents chose their reasoning as consolidating high-interest debt while eliminating mortgage insurance and moving into a longer loan term were a tie for last, both at 4%.
Why Do Americans Avoid Mortgage Refinancing?
While many Americans are interested in refinancing their mortgage, some also find reasons to be cautious of it as well. In fact, between too high of closing costs and not wanting to deal with the trouble of navigating a mortgage refinance, some Americans did not think the process would be worth it at all.
The most popular reason — at nearly 25% — among those who thought it best to avoid mortgage refinancing was that closing costs and fees are too high. The second most popular reason for not getting a mortgage refinance was a tie between not saving enough money in the refinance and too much paperwork and hassle, both at nearly 20%. Plans to move or pay off the loan soon was the next on the list of reasons why people wanted to steer clear of mortgage refinancing at 14.50%. Unemployment or reduced income that would prevent qualifying followed close behind at 11.50% with low credit scores trailing closely behind at 10%.
Americans Usually Choose Refinancing Their Mortgage at the Bank
When it comes to getting their home refinanced, 54% of the respondents chose to refinance their mortgage at a bank.
As stated previously, many banks offer a full spectrum of products aside from refinancing such as credit cards, savings accounts, and checking accounts. The reason why banks may be such a popular avenue for mortgage refinances is because many people may want to work with a lending institution they already have a relationship. They may already trust that company and want to continue doing business with them.
Oftentimes, however, borrowers will need to meet certain criteria with a bank such as credit score, debt-to-income ratio, and credit history in order to be eligible for a loan.
However, consumers should keep in mind that banks may not offer as many loan options as a mortgage lender might, and tend to have stricter credit restrictions than a mortgage lender. Though, it’s much more likely that if a borrower goes through a bank for a home loan, they’ll work with that same lending institution for the entirety of the loan, whereas a mortgage lender may sell borrowers’ loans to a different lender.