What is Mortgage Refinancing?
Refinancing replaces an existing mortgage with a new one, and you can customize details on the new loan including the type of interest rate, the term length, and the amount borrowed.
Speaking with a licensed mortgage consultant will help you set clear financial objectives in order to choose the most appropriate package to refinance your home mortgage.
Benefits of Mortgage Refinancing
Whether interest rates are rising or falling, mortgage loan refinancing is common and there are several benefits that homeowners find with refinancing:
- No More Private Mortgage Insurance (PMI) – Refinancing your home could allow you to get rid of your private mortgage insurance. If your home has increased in value or if you have paid enough into your home so that you owe less than 80% of what it’s worth, you can refinance into a new loan and stop paying private mortgage insurance. Eliminating PMI can lower your monthly mortgage payment, which helps you save money.
- Increase cash flow: You could lower your monthly payment by refinancing your mortgage, giving you greater financial flexibility. One of the best benefits is the relief they can provide in terms of your monthly expenses. There's no reason to pay more than you need to, and a lot may have changed since you first got your mortgage; your credit score may have improved, rates may have changed, and your home's value may have changed as well. Talking to a licensed loan officer about your options is a good first step in determining how a mortgage refinance could help you.
- Pay off debt: Refinancing could allow you to pay off high-interest credit card debt, private loans, auto loans, or other high-interest debt. With a home loan refinance, interest rates are typically lower and it would make more financial sense to make payments on a mortgage refinance rather than higher interest loans.
- Getting a better loan: Whether you want to switch from an Adjustable Rate Mortgage to a 30 Year Fixed Rate, or simply wish to lock in a lower rate, refinancing can provide an opportunity to optimize your mortgage loan.
- Increase your long-term net worth: A lower interest rate on your mortgage means you’ll save money over the lifetime of the loan. You can use the extra cash to buy real estate for retirement, save for your child’s college fund, or buy a vacation home.
- Make purchases with less interest: Financing expensive purchases with your home’s equity lets you take advantage of a lower interest rate than what’s typically available on credit cards. You could use a home loan refinance and pay for a wedding, college, or elderly care and potentially save money with a home refinance that lowers your interest rate.
- Tax deductible interest: Interest on your home’s mortgage is generally tax deductible. A licensed tax professional could assist you with determining your eligibility for any deductions.
Types of Refinance Mortgages:
- Cash Out: It allows homeowners to increase the amount that they are borrowing by tapping into their home’s equity and pulling out the cash difference. When a mortgage refinance is used to provide the borrower a lump sum of cash, you can use the cash in nearly any manner you choose.
- Rate and Term: The interest rate and loan term are the only changes that occur with this type.
- Cash In: A homeowner brings cash to the closing in order to pay down the loan balance that is owed to the lender. This type is the opposite of a cash out refinance.
- HELOC: A Home Equity Line Of Credit lets the homeowner borrow cash against their home equity. The homeowner can borrow what they need and potentially return for additional draws, unlike a 2nd mortgage.
Refinancing Your Mortgage: Things to Consider
A refinance mortgage typically closes more quickly than a buying a house and often requires far less paperwork. When you’re deciding whether to refinance your home, there are key factors to keep in mind.
- How will it affect you financially? Try our refinancing calculator to figure how much refinancing might help your budget.
- How long will you live in the home? If you’re planning to sell or move in the near future, refinancing with a low interest, Adjustable Rate Mortgage could be the best choice.
- Any potential risks? There may be a clause which penalizes you for paying down your mortgage with a home equity credit line of credit. There may be other attorney fees and costs in addition.
When to Refinance
Most borrowers are required to keep their original mortgage for at least one year prior to moving forward with refinancing. You should still check with your lender, however, as each lender and their terms are different.
While it is often best to refinance with the original lender, this is not required. Many lenders will want to keep existing customers and so they may choose to waive a new title search, property appraisal, or other requirement for refinancing.
What Is the Cost to Refinance a Mortgage?
Application fee: this is imposed by lenders to pay the cost of checking the borrower’s credit report and the initial cost of processing the loan request.
Title insurance and search: this is to cover any loss incurred by any discrepancies in the property title and the cost to review public records to verify ownership of the property.
Lender’s attorney fees: whoever conducts the closing, whether a company or attorney, will charge the lender for the fees incurred which will then get passed on to the borrower.
Loan origination and other fees: some lenders charge an origination fee for processing and underwriting a mortgage loan, and prepaid finance charges are assessed by the lender at closing.
Where to Begin a Mortgage Refinance
- Check your credit score—the stronger your credit score, the better interest rates you will be offered to refinance.
- Know your home’s value—research recent home sales in your neighborhood to get a good estimate of your home’s worth.
- Determine all the related costs—closing costs and assorted fees for the application, appraisal, origination, and processing of documents need to all be factored in.
- Collect your paperwork—gather, download and print statements, pay stubs, and anything else the lender requires during the process.