Refinancing a mortgage means replacing an existing loan with a new one, letting you save money in the long run by lowering your interest rate. It also decreases monthly payments, pay off debt faster, and taps your home’s equity if you need extra cash immediately. It is beneficial, but it does not always make the best financial sense to your situation. To learn more about it, make a well-informed decision, and figure out if mortgage refinancing is right for you, read this guide.
How Does Mortgage Refinancing Work?
Refinancing means getting a loan with a different interest rate and terms. Since this is a new loan, you might be resetting the payment period. For example, suppose you currently have a 30-year mortgage, and you have already made five years of payments. In that case, refinancing to a new 20-year loan means paying off five years earlier. In other words, you will be able to live debt-free sooner than expected.
Before refinancing, keep in mind that getting a new mortgage has closing costs, which can be two to five percent of the amount you refinance. These can include an origination fee, an appraisal fee, and discount points.
What Are the Types of Mortgage Refinancing?
Mortgage refinancing comes in different types. Here are your options:
- Traditional rate-and-term refinances: This type of refinancing can reduce your monthly payment or save you money on interest by changing the interest rate, the term of the loan, or both.
- Cash-out refinances: This type of refinancing increases your mortgage debt, gives you money that you can use to fund or invest, and lets you secure a new term and interest. It allows you to take some of the equity in your home.
- Debt-consolidation refinances: In this type of refinancing, your debt will increase, but you can save money in the long run because mortgage rates are usually lower.
- Streamline refinances: It eliminates some of the requirements of a typical refinance and helps you speed up the refinance process.
What Is the Process of Mortgage Refinancing?
- Make sure it is the right option for you. Refinancing should help you reach your financial goals. Before applying for offers, do the math by checking your credit and confirming if you have at least 20 percent equity in your home. Afterward, see current interest rates and set your monthly budget.
- Look for mortgage lenders. Search for different mortgage companies, discuss with them, and take your time to evaluate and compare rate quotes and loan terms. While this can be a tedious process, it helps you ensure you get a good deal. Furthermore, your score won’t reflect the multiple inquiries, so you don’t have to worry if many lenders check your credit within a short time.
- Apply. After deciding on an offer, complete a mortgage application and prepare important documents. Get ready to be asked by your lender for more information about your credit and financial situation.
- Lock in your interest rate. Locking in your interest rate can be done after you are approved for your refinance. Doing this lets your rate stay the same even if market rates change before you close on the loan. This will help you plan your monthly budget.
- Have your home appraised and close on the loan. Appraisal of your home is vital to know if your property is worth enough to secure the new mortgage. The fee is usually part of your closing costs, but some lenders waive this fee. Finally, close on the loan. Bring any required documents and pay for necessary closing costs on closing day.
Pursuing a mortgage refinance provides benefits, but it only helps you with your goals if it makes sense with your situation. Before refinancing, consider the information in this guide to determine if it works for you. In addition, look for the best mortgage company near you to get the best deal. If you are looking for a licensed mortgage broker in Los Angeles, then you have come to the right place. I am Shannon Christenot, and I have been working for over 20 years in the industry. With my experience, you are assured I can help you with your home purchase or refinance needs. Contact me at (818) 601-2231 for a free home refinance analysis!