Most homeowners have heard about mortgage refinancing in ads or from friends and family, but may not completely understand what’s involved with the process. Refinancing offers many financial advantages, so you should get to know the basics to determine whether it’s a smart option for you. Here are some answers to the most common questions people ask about refinancing and how it works.
What is refinancing? Refinancing is when you make certain changes to the existing loan on your home, essentially creating a new mortgage through the process. You’ll actually pay off the old financing arrangement by applying your existing equity and you’ll obtain different terms on your interest rate, monthly payments and loan duration.
Why should I consider refinancing? There are quite a few benefits from refinancing your mortgage, although the exact details will depend on your specific circumstances:
- Lower Interest Rates: By refinancing, your new mortgage will likely offer a lower percentage on interest rates as compared to the old one. Many homeowners have built some equity and a better credit score if they’ve been making timely mortgage payments, leading lenders to offer lower rates.
- Lower Monthly Payments: Because your interest rate is lowered, your monthly mortgage payments can be reduced. Qualifying homeowners can save hundreds per year.
Are there other reasons to consider refinancing? Another reason homeowners may look into refinancing is that they can use a portion of the loan proceeds for large purchases, such as cars, boats or education. You may also be able to apply the funds to reduce credit card debt. Under these circumstances, the refinancing takes into account the equity that you’ve built and the fair market value that may have increased on the property since the original loan was issued.
How do I refinance my home? The first thing you’ll need to do is reach out to the lender that holds your mortgage and find out what options are available. You can also shop around to other companies to compare rates and other terms of the refinancing arrangement. Many times, one or more lenders will make offers available based on current market and economic conditions.
While the specific process will vary based on mortgage company policies, you can expect to fill out a refinancing application, supply financial documentation and obtain an appraisal. However, if you decide to stay with your current lender, they may have much of this information on file. In most cases, you’ll need to have been involved with your existing mortgage for at least one year, making payments in full and on time.
How much will refinancing cost? Typically, you can expect a number of costs for refinancing, but these are usually minimal compared to the advantages you’ll obtain through lower payments and interest:
- Application Fee: Lenders use these fees to cover the costs of obtaining your credit report and for processing.
- Title Insurance & Title Search: A lender wants to ensure that title to the property doesn’t contain any defects or discrepancies in the chain of ownership.
- Document Review Fees: At times, lenders may need to have attorneys review the refinancing documents.
This basic information on mortgage refinancing should help you determine whether it’s worth looking into further, though you may have additional questions. If you’re a homeowner that’s considering refinancing and would like to know more about the process, start by reaching out to a mortgage equity professional.