How To Refinance a Mortgage

To refinance a mortgage; first, let’s start by knowing what it means to refinance a mortgage. Refinancing a mortgage means you get a new home loan to replace your existing one. People always get a refinance to lower interest rates, remove monthly payments or use their home equity.

How To Refinance a Mortgage

While some refinance a home to pay off the loan faster, some remove FHA mortgage insurance or switch from an adjustable rate to a fixed-rate loan. If you can refinance into a loan that has a lower interest rate than you’re currently paying.

You could save money on your monthly payment and the interest you pay over the term of the loan. You might also be able to take advantage of a cash-out refinance, which allows you to tap into your home equity essentially as a lower-interest loan.

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How does Refinancing Work?

When you buy a home, you get a mortgage to pay for it. The money goes to the home seller. When refinancing a home, you get a new mortgage. Instead of going to the home’s seller, the new mortgage pays off the balance of the old home loan.

Mortgage refinancing requires you to qualify for the loan, just as you had to meet the lender’s requirements for the original mortgage. You file an application, go through the underwriting process and go to closing, as you did when you bought the home.

Refinancing a Mortgage, step-by-step Guide

To know how to refinance a mortgage here are guidelines to refinance a mortgage;

  • First, Set your goal. Is it to reduce monthly payments? Shorten the loan term? Or to Get rid of FHA mortgage insurance?
  • Second, Shop for the best mortgage refinances rate. Look out for fees available too
  • Third, apply for a mortgage with three to five lenders. Submit all applications within a two-week period to reduce the impact on your credit score.
  • Fourth, select a refinance lender. To select the best offer, compare the Loan Estimate document each lender offers after you apply. The estimate will tell you how much cash you’ll need for closing costs.
  • Fifth, Lock your interest rate. When you lock the interest rate, it can’t be changed during a specified period. You and the lender will try to close the loan before the rate lock expires.
  • Sixth, 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. Closing on a refinance is like closing on a purchase loan, with one main difference: No one hands you the keys to the home at the end.

These are major guides on how to refinance a mortgage.

What is the Purpose of Refinancing a Home?

Before you consider getting a refinancing of your home you need to know what is the purpose of refinancing a home. The purpose will guide your mortgage refinancing process from the beginning.

Reduce the monthly payment.

When your purpose is to pay less every month, you can refinance into a loan with a lower interest rate. Another way to reduce the monthly payment is to extend the loan term. For example, reduce it from 15 years to 30. The disadvantage of extending the term is that your interest rate will increase in your monthly payment.

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Tap into equity.

When you refinance to borrow more than you owe on your current loan, the lender gives you a check for the difference. This is called a cash-out refinance. People often get a cash-out to refinance and a lower interest rate at the same time.

Pay off the loan faster.

For example, when you refinance from a 30-year mortgage into a 15-year loan, you pay off the loan in half the time. The result will be that you pay less interest over the life of the loan. There are advantages and disadvantages to a 15-year mortgage. One of the disadvantages is that the monthly payments usually shoot up.

Get Rid of FHA Mortgage Insurance.

To get rid of FHA mortgage insurance premiums is to sell the home or refinance the loan when you have accumulated enough equity. Next, estimate your home value, then subtract your mortgage balance to calculate your home equity.

Private mortgage insurance on conventional home loans can be canceled, but the Federal Housing Administration mortgage insurance premium you pay on FHA loans cannot in many cases.

Switch from an Adjustable-rate

To switch to a fixed-rate loan. Interest rates on adjustable-rate mortgages can go up over time. Fixed-rate loans remain the same. Refinancing from an ARM to a fixed-rate loan provides financial stability when you prefer steady payments.

Refinance into Another 30-Year Home Loan?

Reducing your monthly payment is usually the goal. And it’s tempting to refinance with another full 30-year term to lower your mortgage payment. But that means you’ll end up taking even longer to pay off your house and paying more interest over the long run.

Instead, you can ask the lender to match your remaining loan term. For example, if you’ve had a 30-year loan for three years, you have 27 years remaining. You can tell the lender to set up the payments so you repay the refinanced loan over 27 years instead of 30. This way, you reduce the interest you pay over the life of the loan. This is mortgage amortization at work.

Use a Mortgage Refinance Calculator

Using a mortgage refinance calculator can help you shop for the best mortgage. You’ll need to know your new interest rate and your new loan amount.

Once you input the data, the tool will calculate your monthly savings, new payment, and lifetime savings, considering the estimated costs of refinancing your home. Also, the calculator will show yours refinance “break-even” point.

Getting a mortgage generally requires paying fees, which is a big fee of thousands of dollars. It takes a while for a refinance to break even, that is, for the accumulated monthly savings to exceed the refinance closing costs.

Working with a refinance calculator will give you a good idea of what to expect. Even better, when you have a few estimates from mortgage lenders you can enter the terms they offer you into the calculator to help determine which one offers the best deal.

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Shop the Best Refinance Rates

Shopping for the best refinance rate will be the next step to take at this point. Shop for the best refinance rate and get a Loan Estimate from each lender. Each potential lender is required to issue the estimate within three days of receiving your basic information.

The Loan Estimate is a simple three-page document that details the loan terms, projected payments, estimated closing costs, and other fees.

Compare the loan details from each lender and decide which one is best for you. This is a good time to work on that mortgage refinance calculator.

FAQ

Does refinancing hurt your credit?

Refinancing will hurt your credit score a bit initially but might help in the long run. Refinancing can significantly lower your debt amount and/or your monthly payment, and lenders like to see both of those. Your score will typically dip a few points, but it can bounce back within a few months.

What are the steps for refinancing?

How to refinance your mortgage

  • Set a clear financial goal
  • Check your credit score and history.
  • Determine how much home equity you have.
  • Shop multiple mortgage lenders.
  • Get your paperwork in order.
  • Prepare for the appraisal.
  • Come to the closing with cash, if needed.

What will happen if I refinance my mortgage?

When you refinance the mortgage on your house, you’re essentially trading in your current mortgage for a newer one, often with a new principal and a different interest rate. Your lender then uses the newer mortgage to pay off the old one, so you’re left with just one loan and one monthly payment.

Is it worth it to refinance?

Refinancing is usually worth it if you can lower your interest rate enough to save money each month and in the long term. However, based on your current loan, dropping your rate by 1%, 0.5%, or even 0.25% could be enough to make refinancing worth it.

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