How to Refinance Your Mortgage. By refinancing your mortgage, you save money either by reducing your interest rates or by tapping into your equity. Do you want to refinance your mortgage, but you don’t know how? This article will be unveiling how to refinance a mortgage, plus other interesting things you will need to know about mortgage refinancing.
How to Refinance Your Mortgage
Refinancing a mortgage simply means paying off an existing loan and replacing it with a new one. Some of the reasons why people embark on refinancing include;
- To get a lower interest rate
- To reduce the term of their mortgage
- Convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa.
- To tap into home equity, which is to raise funds to deal with a financial emergency, finance a large purchase, or consolidate debt.
These are major reasons homeowners go to refinancing
Mortgage Refinance Meaning
A mortgage refinance is a type of loan that replaces your current home loan with a new one. Most of the time, people refinance to pay off the loan faster, get rid of FHA mortgage insurance, or switch from an adjustable-rate to a fixed-rate loan.
How Does Refinancing Work?
When you purchase a home, you get a mortgage to pay for it. Thus, the money goes to the home seller. So, when you want to refinance a home, you get a new mortgage. And instead of going to the home’s seller, the new mortgage pays off the balance of the old home loan.
However, to get a mortgage to refinance requires you to qualify for the loan, the same way you had to meet the lender’s requirements for the original mortgage. Moreover, you file an application, go through the underwriting process, and go to closing, as you did when you bought the home.
Why Should You Refinance Your Home?
You don’t just wake up one morning and start thinking about refinancing. You will need to consider why you want to refinance your home loan. Your goal is will guide the mortgage refinancing process from the beginning. The following are reasons for refinancing;
Reduce the monthly payment
If your goal is to pay less each month, you can refinance into a loan with a lower interest rate. Or you can extend the loan term.
Tap into equity
If your goal is to refinance to borrow more than you owe on your current loan, the lender will give you a check for the difference. It is known as a cash-out refinance.
Pay off the loan faster
If you refinance from a 30-year mortgage into a 15-year loan, you pay off the loan in half the time. Due to this, you pay less interest over the life of the loan.
Get rid of FHA mortgage insurance
You can cancel private mortgage insurance on conventional home loans, but you cannot in many cases cancel the Federal Housing Administration mortgage insurance premium on FHA loans. However, the only way to get rid of FHA mortgage insurance is to sell the home or refinance the loan when you have accumulated enough equity. So, estimate your home value, then subtract your mortgage balance to calculate your home equity.
Steps to Refinancing a Mortgage
Ready to tackle the refinance process?
- Go! Set your goal by deciding if you want to reduce monthly payments, shorten the loan term, or get rid of FHA mortgage insurance.
- Go for the best mortgage refinance rate. Ensure you check out the fees.
- Then apply for a mortgage with three to five lenders. And submit all applications within a two-week period to minimize the impact on your credit score.
- Choose the best refinance lender. To choose the best offer, compare the loan estimate documents each lender provides after you apply. So, the Loan Estimate will tell you how much cash you’ll need for closing costs.
- Next, lock in your interest rate. When you do this, it can’t be changed during a specified period. Therefore, the lender will try to close the loan before the rate lock expires.
- Lastly, close on the loan. This is when you’ll pay those closing costs that were listed in the Loan Estimate and again in the Closing Disclosure.
These are steps on how to refinance a mortgage.
What are the steps for Refinancing?
The steps to refinancing your mortgage are;
- Set a clear financial goal.
- Understand your credit score and history.
- Shop around for mortgage lenders to see how much equity you have in your home.
- Get your paperwork in order.
- Prepare for the appraisal.
Where do I start when refinancing my house?
You can start the mortgage refinance process by shopping around to compare rates, keeping in mind your unique financial situation.
What will happen if I refinance my mortgage?
When you refinance the mortgage on your house, you’re simply trading in your current mortgage for a newer one, often with a new principal and a different interest rate. Your lender will then use the newer mortgage to pay off the old one, so you’re left with just one loan and one monthly payment.