Mortgage Refinance 101
As a homeowner, you may often come across deals and options for refinancing your home. The process of refinancing may seem complicated, but breaking down the different elements of this process can help you to better understand the potential benefits. The purpose of this guide is to help you learn about refinancing and discover ways you can contact lenders for pricing options and applications.
What is Mortgage Refinancing?
Mortgage refinancing is essentially the process of signing up for a new payment agreement for your home. When you refinance your home, you will receive a whole new loan with different terms and a new interest rate. Your chosen lender will pay off your previous home loan completely so that you are only left with the refinanced mortgage. The application process and submission requirements are generally the same as with a standard mortgage. You will need to have your home appraised, submit financial documents, and pay closing costs to complete the process. There are many reasons why people choose to refinance, but one of the main objectives is to save money.
Refinancing for Lower Rates
Refinancing is often a favorable option for homeowners who are struggling to make the monthly payments. By comparing lender prices for lower rates, you may be able to reduce your monthly payment by a significant amount. Many homeowners with adjustable rate mortgages will choose refinancing to help lock in a low fixed rate for the remainder of a mortgage term.
The new loan term that you choose for refinancing can have an impact on your interest rate as well. For example, if you choose to refinance for a 15-year fixed rate mortgage, you will likely have a much lower interest rate than you would with a 30-year fixed rate mortgage. During the refinancing process, your monthly rates will be set lower, but the length of the loan will often reset according to the new term that you select. For example, if you owned a home for 10 years and had a 30-year fixed rate mortgage, your refinanced mortgage would not be set to 20 years; it would reset back to 30 again. This is why it’s important to select a term that fits your needs, your budget, and the length of time for which you want to pay off the home.
What is Cash-Out Refinancing?
Another reason to refinance is to take out a large loan on your existing equity and the payments you have already made. This type of refinancing is known as cash-out refinancing. It includes a payback of money that you have already paid toward the home, and it’s ideal for when you’re making major life changes or navigating tough times.
It’s pretty simple to break down the cash-out refinancing process and understand how it works. For example, your home may have originally cost $200,000. If you already paid $50,000 toward the home, your principal balance would now be at $150,000. By seeking $25,000 through a cash-out refinancing agreement, the mortgage would add up to $175,000 instead of the $150,000. You would be paying back the extra $25,000 through your monthly mortgage payments. This option is preferable to obtaining a separate loan and can be set up with lower interest and different monthly terms.
If your home appraises for more money than you originally purchased it for, cash-out refinancing gives you the option of collecting even more money. For example, your home may be valued at $250,000 instead of $200,000. If you’ve already paid $100,000 off of the home, the remaining principal balance would be $100,000. The increased value and equity in the home after appraisal would qualify you for a cash-out refinancing of $150,000. Your mortgage terms would be based off of this amount, and you could receive $50,000 in cash after the agreement closes.
Do I Qualify for Refinancing?
Owning a home doesn’t make you an automatic qualifier for refinancing. As with a standard mortgage, you need to meet specific criteria to refinance and set new terms. One of the more important aspects of the qualification process is your credit score. New mortgage lenders want to see consistency in your payments. This includes your current mortgage and any other types of credit that you may have. If your credit score is low or you have missed mortgage payments, it may be harder to secure a refinanced mortgage. Taking the time to build your credit and showcase financial responsibility will help you to refinance the home and will allow the process to go smoothly.
What is the Break-Even Point?
Once you decide to refinance your mortgage, it’s important to understand your break-even point. This point marks the time when your savings will equal out the costs of refinancing. As you refinance, you will have to pay several fees and closing costs. These typically add up to thousands of dollars, but they vary by lender. Once those costs are calculated, you can compare your monthly savings to see how long it takes to break even. For example, your refinancing closing costs may be $3,000. If your new payment saves you $150 a month, it will take 20 months for you to reach the break-even point. It’s important that you live in the same home for the duration of the 20 months in order to break even and make the refinancing worth it. Each month after the 20 months represents your true savings.
Refinancing can be easily accomplished through proper planning and a thorough understanding of your options.
Use your new knowledge about mortgage refinancing to browse rates and apply to lenders.