This Is How Mortgage Refinancing Really Works
The process of refinancing a mortgage means getting a new loan to pay off your existing one. Usually, homeowners refinance to reduce their monthly payment with a longer repayment term, cash out a portion of their equity, or take advantage of lower interest rates. However, it is important to know how the process works before you begin.
Typically, you start the mortgage refinance process by shopping around and comparing terms like interest rates and more with different mortgage lenders to see who gives you the best offer. You then compare the offer with the terms of your current loan.
If you notice an improvement in your credit since you were approved for your first loan, you have a better chance of qualifying for more favorable terms.
Keep an eye on the closing costs as you proceed. For instance, refinancing your loan with a lender costs about $5,000, and your monthly payment is only $100 lower than what you currently pay, you’ll have to stay in the home for at least 50 months to make this new mortgage worth it.
Also, keep an eye out for things like prepayment penalties, which may cause issues if you refinance again or pay off the mortgage early.
Some of the top reasons homeowners choose to refinance their mortgages are:
Lower payment and interest rate: If market rates have dropped or your credit has improved since you got your first loan, you might be able to save money on interest with low monthly payments and interest rate that is lower.
Cash-out: If you have enough equity in your home, you might be able to cash out a portion of it with a refinance to buy out an ex-spouse in a divorce, pay bills, or finance a large purchase.
Change rate type: If your original loan has an adjustable rate, switching to a loan with a fixed rate can help you dodge market fluctuations.
Change loan term: Typically, you can qualify for a lower interest rate if you shorten the term of your loan, for instance, 30 years to 20 or even 15 years. This can also help you save interest over the loan term. You can potentially lower your monthly payment if you extend your loan term.