Complete Guide on How Does Mortgage Refinancing Work?

Mortgage refinancing means that you are going to pay off an existing loan and replace it with a new loan. There was a time when mortgage rates reached their lowest that led to multiple mortgagors opting for refinancing. There are multiple benefits of mortgage refinancing. They include lowering your mortgage payment, consolidating debt, decreasing the term of the loan, and more.

Some of the most common types of mortgage refinancing are rate-and-term, cash-out, and cash-in. With rate and term, you can’t change the principal balance of the loan. It only involves alteration to the interest rates or terms.

In the case of cash-out, the refinanced loan value is more than the current balance. So the difference is paid by cash. With cash-in, the homeowners try to refinance to reduce the loan by lowering the interest rates. You won’t even have to take mortgage insurance with the new loan in case of cash-in. So the process is not difficult only the criterion change. It isn’t as complicated as buying a new home.

If you want to know how does mortgage refinancing work then keep reading this space.

 

 

When Will You Need Mortgage Refinancing?

 

Reason #1: To secure a lower interest rate:

One of the best ways of mortgage refinancing is to reduce the interest rate on the current loan. Just keep an eye on the market to know the right time for refinancing. The time you see a significant drop in interest rates, apply for refinancing. Even a 1% reduction in interest rate is a huge saving.

Also read: Cash Out Refinance: How to Know if it’s Time

For this, you can use an alternative too. Just apply for refinancing to elongate the time period. For example, you have taken a loan for a time period of 10 years then extend it to 20 years. In this way, the overall burden of the monthly payment will reduce.

 

Reason #2: To Consolidate Debt or Tap Equity:

Here, the homeowners demand a bigger loan than they owe on their current loan. The homeowners justify refinancing by saying that remodeling of the house will increase its price. So that more loan is granted. They basically try to cover other expenses through this money. Another reason could be to get rid of high-interest debt. So mortgage refinancing to replace a high-interest debt with a low-interest one is truly beneficial.

 

Reason #3: Switching to fixed-rate mortgage:

If you are experiencing a periodic change in the interest rate that is high you may land in trouble. So in such a case switching to the fixed-rate mortgage will ensure more financial security. It will reduce the interest rate and result in peace of mind for you.

 

Reason #4: Switching to the adjustable-rate mortgage:

Suppose, you own a fixed rate home loan. Now, you observe a significant decrease in interest rates in the market. If the fixed rate of interest is higher than the current rates then go for mortgage refinancing. Once the market observes a decrease in the rate of interest, it usually keeps decreasing for a significant time period.

 

Reason #5: FHA Mortgage Insurance Needs To Be Cancelled:

Federal Housing Administration is one mortgage insurance premium that is exceptional. By exceptional, we mean there are chances that it will not get canceled. So in such a case, the mortgage refinancing comes into the picture. You must refinance after you accumulate enough equity. For instance, the difference between mortgage insurance and home equity must be high.

 

 

Mortgage Refinancing Process Explained

 

#1: Know your why:

You must set a goal for mortgage refinancing. Why do you need it? For example, reduction of interest rate or loan term. It can be any of the above reasons explained or something else. Only then, you must proceed further.

 

#2: Catch the opportunity:

This is a crucial step in mortgage refinancing. Here, you must keep an eye on the mortgage refinance rates. Grab the best mortgage refinance rate to benefit more. You can even take the help of an expert to inform you about the mortgage rates.

 

#3: Find a good lender:

Just because you have been working with one lender doesn’t mean you need to stick to him. There are multiple lenders out in the market competing to offer a mortgage. Another instance could be that there are multiple who may reject your application. So, submit your application to at least five to six lenders. There are many lenders like Bank of America and Guild Mortgage.

 

#4: Choose a good lender:

Once you apply for the refinance and they are ready to approve it, its time to choose the lender. Every lender provides a document consisting of complete details of the loan estimate. It will give you a clear idea that how much cash you need to pay for closing costs.

 

#5: Fix a favorable interest rate:

After that, lock the interest rate. After all, the main goal is to reduce the burden. You cannot change it so choose wisely. Make sure you close the loan within the rate lock period.

 

#6: Pay off the old loan:

It’s time to pay the closing costs that are clearly stated in the loan estimate. So its time for closing disclosure. It works more like closing a purchase loan.

 

 

Conclusion

You cannot decide whether you want to refinance until and unless you submit the applications. However, the benefits can be calculated with the loan estimate value and your home’s value. There are some mortgagees that offer a change in loan’s term but it totally depends on your creditworthiness.

Also read: Mortgage Calculator with Taxes, Insurance, PMI & HOA

Some people claim that breakeven points are quite beneficial in decision making. So you must decide the sum of the total costs by your monthly payment. In case, you are planning to shift to another house before closing the loan then it’s not worth it.

Before proceeding for mortgage refinancing just take a look at your future plans. Also, the current situation matters. Even if multiple lenders are ready to offer to refinance, the decision should be taken keeping in mind all the scenarios. If you don’t have the right plan it can cost you a lot. Make sure to calculate everything. Refinancing has both advantages and disadvantages.

Also read: What is the Difference Between Pledge, Hypothecation, and Mortgage?

We hope the post on mortgage refinancing is beneficial for you. By now, you might have understood the whole process of refinancing. If you want to share your thoughts on mortgage refinancing and how it works then do share it. We would love to hear from you.