Refinancing your home loan is one of the best financial moves you can make. A mortgage refinance simply means replacing the current home loan you have with a new one. Furthermore, most people do refinance for many reasons like tapping into their home equity, cutting their monthly payments, or reducing their interest rate.
In other cases, some people simply refinance a home to pay off their loan faster, switch from an adjustable rate to a fixed—rate loan or get rid of FHA mortgage insurance. However, one must understand the benefits, process, and potential risks before they make a decision.
How Does Refinancing Work?
Now, you know that when you buy a house, you will pay for it with a mortgage. The lender you work with pays the money to the one selling the home and you pay back the lender, usually per month.
However, when you refinance a home, you will get a new mortgage. In this case, the lender doesn’t pay the home seller. Instead, it pays of the balance of your old home loan. Also, you will pay the lender back based on the amount you get on your new mortgage.
Furthermore, refinancing will require you to file for an application and go through the underwriting process. Then, you can close the deal, similar to how you purchase a mortgage.
Why Consider Refinancing Your Home Loan?
There are many benefits you get when you refinance your home loan and it depends on both your financial goals and current market conditions. Here are some of the best reasons why you should consider your home loan:
Shortened or Extended Loan Term
When you make the decision to refinance your home loans, it allows you to adjust the duration of your mortgage. Furthermore, switching from a 30-year to a 15-year loan can help you save interest costs, and extending the terms can also lower your monthly payments.
Tap into Home Equity
Most homeowners who build up equity can choose to refinance just to access the cash for home improvements, debt consolidation, and more. This is also known as cash-out refinance.
Lower Interest Rates
Another great benefit of refinancing is that it is the perfect opportunity to secure a lower interest rate. Additionally, securing a lower rate reduces your monthly mortgage payment and helps you save thousands over the life of the loan.
Switch Between Fixed and Adjustable-Rate Mortgage
Some people have an adjustable-rate mortgage and they anticipate an increase in interest rates. A great way to gain stability and predictability in your payments is by refinancing to a fixed-rate rate mortgage. This also works vice versa if you want to switch to an ARM.
These are some of the best reasons why you should consider a refinance on your home loans as many benefits come with it.
When To Refinance A Mortgage
If you find out that mortgage rates are lower currently than they were when you bought your home, then you should look at refinancing. It could help you save money and with a lower interest rate, your monthly payment will reduce.
Another good period for you to refinance is if you want to get rid of your FHA mortgage insurance premium. However, you must be very calculative about the rates and see what is best for you.
Furthermore, other situations when you might consider refinancing include reasons like paying off the loan faster, reducing your monthly payment, tapping into equity, and more.
How Much Does It Cost To Refinance A Mortgage?
The fees of refinancing and closing costs are very similar to the percentages you will pay for a purchase mortgage. Typically, this costs about 2% to 6% of your total outstanding principal balance. So, it is important that read the fine print in your print mortgage to see if you will owe a mortgage prepayment penalty.
How To Find The Best Refinance Rates
Once you have made the decision to refinance, these are the best ways that you can find the best deals:
Shop Around: This involves you getting and comparing the loan estimate from a minimum of three lenders. Carefully review the three-page document that gives you information on the loan term, closing costs, payments, and other fees.
Calculate your ‘break-even’ point: You will pay certain fees when you get a mortgage and this often leads to thousands of dollars. What’s more, it can take up to a few years for a refinance to ‘break even’ and this means the accumulated monthly savings to exceed the refinance closing costs.
Submit Your Application: Once you have selected a lender, you will need to submit a refinance application. This simple process will require you to provide financial documents like pay stubs, tax returns, bank statements, and a credit check.
Appraisal and Underwriting: Once you have submitted the necessary, the lender will require a home appraisal to determine the current market value of your property. Next, an underwriting will follow and this is where the lender reviews your financial information and appraisal report to finalize your loan approval.
Closing the loan: Once your refinance is approved, you will need to sign the loan documents and pay any closing costs, which range from 2% to 5% of the loan amount.
Once the loan is successfully closed a loan, your new mortgage will replace the old one. These are the best ways that you can find the best refinance rates that will suit your financial situation.
Frequently Asked Questions
Here are some frequently asked questions that you can check out:
How often can you refinance your home?
There really is no limit to how many times you can refinance your home. However, it is still vital that you consider the cost and your long-term financial goals. You might just find out that financing frequently isn’t always beneficial.
Can I refinance with bad credit?
You can refinance your home loan with bad credit. However, you should know that you might face higher interest rates and stricter terms. This is why you need to improve your credit score before you refinance as it helps you get better rates and terms.
Is refinancing a good idea if interest rates are rising?
Honestly, this depends on your financial situation and current loan type. However, if you already have a low fixed rate, then refinancing in a rising rate environment isn’t necessary.