Mortgage Refinancing is when a homebuyer gets a new Mortgage Loan to replace their current Loan. The new mortgage loan helps them save money or meet another financial goal. Mortgage Refinancing is popularly known as Home Loan Balance transfer. People often refinance their Mortgage Loans to take advantage of lower interest rates, reduce monthly payments, extend or shorten the mortgage loan terms, or switch from an adjustable-rate mortgage to a fixed-rate loan.
Mortgage Refinancing is one-way homebuyers can use their Home to leverage that investment. The primary goal of the Mortgage Refinancing is usually to save the money over the life of the loan. By securing a lower rate of interest or extending the Mortgage Repayment period, the homebuyers reduce their Monthly Payments and could decrease the overall cost of borrowing. However, it is crucial to consider any fees or closing costs associated with Mortgage Refinancing, as they can affect the overall savings.
Mortgage Refinancing is the most effective way to save money and improve personal finances. With Mortgage Refinancing, homebuyers can replace their current mortgage with a new Mortgage Loan. Once the homeowners have their new mortgage loan, they begin making payments on that Loan. Depending on the Borrower’s situation, their new mortgage might also involve any Second Mortgage or Home equity lines of credit (HELOC). The homebuyers might wrap all of their current mortgage and even consolidate other outstanding debt into the new mortgage loan with Mortgage Refinancing.
What Is Mortgage Refinancing?
Mortgage Refinancing means essentially trading in the current mortgage for a newer one often with a new mortgage principal and different rate of interest. The mortgage lenders then use the newer mortgage loan to pay off the old one, so the borrowers are left with just one loan and one monthly payment. There are several reasons why people refinance their homes. Homebuyers can cash out refinance to make use of their home’s equity or look into rate and term refinance to get better interest rates and lower monthly payments. When homeowners refinance their mortgage, they apply for a new mortgage loan just as they did when they bought their house. But this time, instead of using the loan money to purchase a home, it is used to pay off their existing mortgage balance.
What Are the Reasons Why Homeowners Refinance?
Mortgage Refinancing means paying off an existing Mortgage loan and replacing it with a new one. There are a lot of reasons why homebuyers refinance their Mortgage:
- To obtain a lower Interest rate.
- To shorten the term of their Mortgage Loan.
- To convert from the Adjustable-rate Mortgage (ARM) to a Fixed-rate Mortgage or vice versa.
- To tap into home equity to raise funds to deal with financial emergencies, finance a large purchase, or consolidate debt.
How Does Mortgage Refinancing Work?
When homebuyers Refinance a Mortgage Loan then they will apply in a similar way to when they applied to purchase their Home. In many ways, the Mortgage Refinancing process is like a less arduous method of getting a purchase mortgage. In general, the homebuyers will submit to a credit check, turn in financial documentation, submit to a home appraisal, and undergo the underwriting process. Mortgage Refinancing costs between 3% and 6% of a loan’s principal and as with the original mortgage requiring the appraisal, title search, and application fees, homeowners need to determine whether Mortgage Refinancing is a wise decision or not. Typically, the Mortgage Refinancing process takes as long as purchasing a home, averaging between 30 and 45 days.
What Are The Types of Mortgage Refinancing?
There are many types of Mortgage Refinancing, here is a breakdown of each:
- Rate-and-term Refinance: This form of Mortgage Refinancing changes either the loan’s rate of interest, the loan’s repayment term, or both.
- Cash-out Refinance: when a homebuyer does cash-out refinance, they are using their home equity to take cash out to spend. This increases their mortgage debt but gives them money that they can invest to use to fund a goal.
- Cash-in Refinance: With cash-in refinance the homeowners make a lump sum payment to reduce their Loan-to-Value ratio (LTV), which cuts their overall debt burden, potentially lowers their monthly payments, and also could help qualify for a lower interest rate.
- No-closing cost Refinance: It is a type of low-cost refinance that allows homeowners to refinance without paying closing costs upfront, instead, the borrowers roll those expenses into the loans, which means higher monthly payments and likely a higher rate of interest.
- Short Refinance: If homeowners struggling to make their mortgage payments and are at risk of foreclosure, their mortgage lender might offer them a short refinance, where their new loan is lower than the original amount borrowed, and forgive the difference.
- Reverse Mortgage: A homeowner aged 62 or older, might be eligible for Reverse Mortgage that allows them to withdraw their home’s equity and receive monthly payments from their mortgage lender. They are able to use these funds as retirement income, to pay medical bills, or for any other goal.
- Debt Consolidate Refinance: Similar to Cash-out refinance, Debt consolidation refinance provides the homeowners cash with one key difference such as they can use the cash from the equity they’ve built in their home to repay other non-mortgage debt, like credit card balances.
- Streamline Refinance: This is the process for homebuyers by eliminating some refinance requirements, such as a credit check or appraisal. Streamline Refinance is available for FHA Loans, VA Loans, USDA Loans, Fannie Mae and Freddie Mac loans.
How To Refinance Mortgage?
The Mortgage Refinancing process is similar to the Applying for the Mortgage Loan Process. The Mortgage Lenders review homebuyers’ finances to assess their risk level and determine their eligibility. Here is the complete process of Mortgage Refinancing:
- Set a clear financial goal: If a homebuyer is reducing their rate of interest but restarting the clock on a 30-year mortgage, they might pay less every month, however, they will pay more over the life of their mortgage loan in interest.
- Check Credit Score and History: The homebuyers will need to qualify for the mortgage refinance just as they needed to get approval for their original mortgage loan. The higher their credit score, the better the mortgage refinance rates the mortgage lenders offer them, and the better their chances of underwriters approving their loan.
- Determine how much home equity the homebuyers have: The home equity is the total value of the home minus what they owe on their mortgage. To figure it out, the homebuyers need to check their latest mortgage statement to see their current balance. Then check home search sites or have a professional appraisal to estimate their home’s value. The homebuyers will get better rates and fewer fees (and won’t have to Pay for Private Mortgage Insurance) if they have at least 20 percent equity in their home.
- Shop Multiple Mortgage: Once the borrower has chosen a mortgage lender, they need to discuss when it’s best to lock in their rate as they won’t have to worry about rates climbing before your refinance closes.
- Get Paperwork in Order: Homebuyers have to gather recent pay stubs, federal tax returns, bank statements, and anything else their mortgage lender requests. The mortgage lender will also look at the borrower’s credit score and net worth, so they have to disclose all their assets and liabilities upfront.
- Prepare for Home Appraisal: Mortgage lenders typically require home appraisals to determine its current market value. A professional appraiser will evaluate borrowers’ homes based on specific criteria and comparisons to the value of similar homes recently sold in their neighborhood.
- Come to closing with Cash: The closing disclosure, as well as the loan estimate, lists the closing costs to finalize the Mortgage Loan.
Mortgage Refinance Reviews
Mortgage Refinancing can help homeowners lower their interest rate, reduce monthly mortgage payments, access equity, and change their loan type. However, the drawbacks of Mortgage Refinance, including closing costs, a larger balance, and extending the loan term, can nullify the benefits. Here are some Pros and Cons of Mortgage Refinancing:
Pros:
- The homebuyers can Lower the rate of interest.
- The homeowners can lower their mortgage payments and create more space in their monthly budget.
- The homebuyers can decrease the loan’s term and pay it off sooner.
- The Borrowers can tap into their home’s equity and take cash out at closing.
- Homebuyers can change from an adjustable-rate to a fixed-rate mortgage.
- Homebuyers can cancel private mortgage insurance premiums to avoid paying unnecessary fees.
- The Borrowers likely won’t need to make another down payment.
Cons:
- The homebuyers will have to pay closing costs.
- The borrowers might have a longer loan term, adding to their costs and delaying their payoff date.
- The homeowners could have less equity in their homes if they take cash out.
- The Mortgage refinancing process can take between 15 and 45 days or more.
- The borrower’s credit score will temporarily take a hit.
- Most Mortgage refinances won’t affect property taxes, but completing a remodel with a cash-out refinance can increase the home’s value which could mean a higher tax bill.
- If the homeowners have paid off a significant chunk of their mortgage, refinancing might not make sense.
Frequently Asked Questions (FAQs)
Question 1: Is a Second Mortgage and Mortgage Refinancing the same?
Answer: No, Second Mortgage and Mortgage Refinancing are not the same thing. A Mortgage Refinancing replaces the current mortgage with a new one, and homeowners will only have one payment at one interest rate. However, A Second Mortgage also known as a home equity loan takes out a second lien on the home. With a home equity loan, the homeowners will keep their original mortgage payment and add a second monthly payment for repaying their home equity.
Question 2: Can I reduce monthly mortgage payments without Mortgage Refinancing?
Answer: If you are interested in lowering monthly mortgage payments a Mortgage Recast, is a straightforward option. It involves a significant lump-sum payment on the loan principal so the lender can reamortize the balance.
Question 3: Will Mortgage Refinancing affect my Credit?
Answer: When a homeowner Refinances their Mortgage, the mortgage lender pulls a hard inquiry and runs a credit report on the borrower’s history. This approval process will lower the homebuyer’s credit score but only for a short period of time. As long as the homeowners don’t open any other credit cards and continue repaying any debts they have, their credit score can recover after a few months.
Question 4: Can I Tap into Home Equity without Mortgage Refinancing?
Answer: You are able to access equity in your home without Mortgage refinancing. Make sure to consider a home equity loan or a home equity line of credit (HELOC) as alternative ways of reaching your financial goals.
The Bottom Lines
Mortgage Refinancing can be a great financial move if it reduces the mortgage payment, shortens the term of the Mortgage Loan, or helps the homeowners build equity more quickly. keep in mind that Mortgage Refinancing costs 3% to 6% of the loan’s Principal. It takes years to recoup that cost with the savings generated by a lower interest rate or a shorter term.
