How To Refinance Your Mortgage?

Buying a house is the single biggest investment that you’ll make in your life. And doing that will be practically impossible without a mortgage. But when you get a mortgage with a better rate, would you not want to take advantage of it? That’s where mortgage refinancing comes in.

If this term is new to you, it might seem daunting. But worry not! In this article, we’ve listed a few things to help you better understand what and how refinancing your mortgage works and how you could go about it!

What Does Refinancing A Mortgage Mean?

In simple terms, refinancing your mortgage is a process of paying off your current home loan with a new one. Of course, it’s a lot more than that! How it works is that the capital you get on the second loan doesn’t go to the seller of the house. It pays off the balance amount of your home loan. That way, your existing loan is paid off while you save some money by paying off the new loan at a cheaper rate of interest.

Advantages Of Refinancing Your Mortgage

To help you understand these steps, you first need to know why refinancing a mortgage can be ideal for you. Here they are!

Reduces Your Monthly Payments

When you plan on refinancing your mortgage, you look for a loan with a lower rate of interest and better benefits. So when you pay off your current mortgage, you’re left with a smaller loan installment with a relatively low rate of interest. This allows you to save some money at the end of the month.

Another option for you to reduce your monthly payments is by extending the term of your loan. In this way, you can pay off your current loan over an extended period of time. It not only gives you some extra time but also allows you to pay smaller installment at a given time. The obvious drawback to this is that you end up paying more interest in the long term.

Helps Pay Off Your Loan Faster

You can get your mortgage refinanced to get your loan paid off in the short term. For example, your current loan has a long-term installment period and you don’t want to be spending that much extra interest, you can go ahead with refinancing your mortgage. That way you can pay off a major chunk or all of your loan faster along with a considerably lower amount of interest and a reasonable time period as well. You may see our article on how to pay off the mortgage faster.

Helps Take Advantage Of Home Equity

A home equity is basically the overall value of a home minus the amount you owe on your mortgage. You can cross-check this by looking at your mortgage statement. If you want to be extremely sure about the percentile and amount, you can also hire a real estate agent to get the estimated value of your home.

When you apply for a mortgage refinance, you can borrow more capital than you owe on your current loan. In such cases, the lender gives you a check for the difference that you can utilize however you like. You can keep this extra cash for any of your renovations, home improvements, or other expenses around the house.

This process of using your home equities is called a cash-out refinance. Here, you get two benefits; You pay off your entire loan in one go without having to pay a higher rate of interest over a long period of time and you get some additional cash with a lower rate of interest to pay it back with.

Also See: What is Home Equity Line of Credit

Helps You Get A Fixed-Rate Loan

If you have an adjustable-rate mortgage and want to change it to a fixed-rate loan, getting your mortgage refinanced is a smart move. This way, even if the rate of interest goes higher in the future, you’ll have a fixed rate of interest to pay. This allows you to have a predictable and stable monthly payment for your mortgage. It’s best for someone who wants to have a steady payment system to manage their finances.

You Can Do Away With FHA (Federal Housing Administration) Mortgage Insurance

Unlike private mortgage insurance, FHA mortgage insurance cannot be cancelled in most situations; you’ll need to sell your house for that. The other way is to have enough equity to refinance this loan. If you want to get rid of FHA premiums, applying for mortgage refinancing is ideal for you.

Disadvantages Of Refinancing Your Mortgage

Now before you get all excited, you must know that refinancing a mortgage isn’t without its share of drawbacks. Go through them once and it will help you paint a full picture:

Requires You To Spend Money

Mortgage refinancing is literally you getting a loan to pay off an existing one. In even simpler words, you’re borrowing money to spend it again. Since the process is mostly the same as when you got the original loan, the closing costs will be more or less the same.

You Can Get An Unfavorable New Rate Of Interest

Refinancing your mortgage makes sense only if your new rate of interest is considerably lower than the first one. A difference of less than one percent wouldn’t exactly make it worthwhile as you need to recover your closing costs as quickly as possible.

Can Extend Your Loan Term

Refinancing your mortgage results in your loan term getting extended. For instance, if you’re already 10 years into a 30-year mortgage and decide to get a refinance, the 10 years are added back to your term. This means you won’t actually own your home for another 10 years. A solution to that would be paying extra principal amounts each month; if that’s not feasible and you’d rather get complete possession of your house quickly, then mortgage refinancing might not be as appealing to you.

You May Fall Into A ‘Refinancing Spiral’

Every time you hear of falling mortgage rates, you may be tempted to refinance your mortgage in an attempt to save more money. But chances are high that you’ll end up spending more than you save (remember the closing costs?). Unless the fall in the mortgage rate is high enough, you should refrain from even considering refinancing!

How To Refinance Your Mortgage?

Now that you know what refinancing your mortgage is, what the benefits of the process are, and some of the reasons you need to get through with it, here’s how you can refinance your mortgage. We have broken down the process in smaller and easy-to-understand steps. Take them away!

Step 1: Set A Clear Financial Goal

Before you apply for a mortgage refinancing, make sure that you know the reason you’re applying for. It could be anything; just having your goal in mind helps you plan out your application process.

Step 2: Check Your Credit Score and History

For you to qualify for a mortgage refinance, you need to get your credit score and history approved. Ensure that your credit score is excellent so that lenders agree to offer you an opportunity. This is one of those important criteria that lenders pay attention to in your application.

So if you have a bad credit score for some reason, wait for a few months to improve it. Once your credit score gets better, you can start applying immediately. Remember, the better credit score and history you have, the better chances you have at qualifying for a mortgage refinance. Also read our article on Credits for first time home buyers.

Step 3: Tap Into Your Home Equity

In your application, you have to mention your home equity for lenders to understand the amount you require. Under normal situations, you can get your mortgage refinance with as little as 5% equity. But it’s better to have a larger amount to ensure you get better rates and lower fees. If your equity is more than 20%, the lender is more inclined to offer you the mortgage.

The important criteria that lenders do not compromise on is that your home equity is not less than 20% if you want to get a good offer.

Step 4: Look For Multiple Mortgage Lenders

The next step for you is to start looking at mortgage lenders. There are plenty of mortgage lenders in the market who are ready to offer you some good rates, but you need to ensure that you get quotations from a minimum of three lenders to understand the kind of rates you’ll be offered. The more lenders you approach, the better understanding you’ll have about current rates in the market and the kind of mortgage refinancing you could possibly get.

Once you get a quotation from all the lenders that you’re interested in working with, make sure you compare all of their rates. This includes comparing the rate of interest, cost of fees,  modes of payment, and other factors. Once you’ve compared all of these things, you can then pick and choose a lender that you want to work with and negotiate the rates with.

Step 5: Get Your Paperwork Ready

Paperwork amounts to a greater deal when it comes to refinancing your mortgage. You need to have all of your important documents like tax returns, bank statements, credit score history, house equity, etc, in one place. Every mortgage lender may have a different set of documents that they would ask from you, so make sure that you attach all of these documents to your application without fail.

One thing you need to note is that all of these documents need to have recent details and quotations. Getting your documents ready in the first place helps you be prepared and save time when negotiating the rates at the last minute.

Step 6: Prepare For The Appraisal

When preparing for the appraisal, you need to know that you’ll have to pay a few hundred dollars. During the appraisal, the mortgage lender usually asks for a refinance finance appraisal from you. This helps them understand your home’s current market value. Hence, it would be advisable to let them know of any renovations, repairs, or improvements that you have done by yourself in the house. This allows you to get a higher appraisal from the lender.

Step 7: Keep Tabs On Your Loan

Once you’ve gotten your mortgage refinanced, make sure to keep all the paperwork stored carefully. Also, make sure that you set up automatic payments on a regular basis so that you don’t miss out on them and pay them off in due time. There are some banks that agree on a lower rate of interest if you sign up for their auto plan services.

Sometimes, lenders resell the loan they lent you to some companies after closing. So keep an eye out for any kind of notification regarding the same. You don’t want to be paying off your mortgage to the wrong company or person.

Step 8: Close The Loan

Before you close the loan, you’ll get to decide on a rate of interest that keeps changing in the initial period. Once you have finalized the rate of interest with your lender, your application is sent forward for approval. After approval, you just have to pay off the closing costs. These costs are always mentioned in the closing disclosure and also the loan estimate, so make sure you only pay the price mentioned in these documents.

Closing your refinance mortgage is as good as closing a loan because at the end, the house is completely yours; the only difference here is that you already have the keys to your house before closing the deal.

Summing Up

All of the things mentioned above are pretty much all the things that you need to know about your mortgage refinancing. So now that you have understood how to go about it, you can make informed decisions and not fall for fake deals and scams. Just make sure to close your interest rates when they’re low instead of waiting for a long period of time and you’re all set!

Interesting: 10 States With The Most Mortgage-Free Homeowners

FAQs On Refinancing Your Mortgage

Reasons To Refinance Your Mortgage?

There are multiple reasons why you need to refinance your mortgage. Some of the financially beneficial reasons are getting a fixed rate of interest, getting a lower rate of interest, and paying off the loan within a smaller duration of time.

How Does Refinancing Work?

When you decide to refinance your home, you basically get a new mortgage to pay off your existing one.  The new mortgage that you get pays off your balance on the current mortgage. The application system is quite similar to getting a home loan.

What Is The Purpose Of Refinancing Your Home?

Many people have been inclined towards refinancing their mortgage or home to gain financial benefits. One of the main financial benefits that you gain from doing so is that you get to pay off your loan before the due time which saves you some future interest installments.

What Are The Risks Of Refinancing Your Mortgage?

The major risks associated with refinancing your mortgage are that you may be rejected outright for low credit scores, your loan repayment term will be extended, and a poor rate of interest on a new mortgage will make your task of recovering your expenses more difficult.

See Also: Things to get Pre-approved for Mortgage | How to get Mortgage if you are Self Employed

Written by

Rostislav Shetman is the founder of 9Kilo Moving. He has been in the moving and relocation industry for more than 25 years, making him an expert in his field. Rostislav started as a helper, dispatcher and driver and has worked his way up to owning his own company. He takes great pride in his work and enjoys helping people relocate across the United States of America. When he's not working, Rostislav enjoys spending time with his family and friends. They are the light of his life and bring him happiness every day.