What’s the process to refinance a mortgage?

Refinancing a mortgage is the process of swapping out your current home loan with a new one, preferably at a better rate or with better terms.

In general, borrowers refinance to cut down the interest rate on their note, lower monthly payments or pull out equity from their home. It’s also possible to refinance with the idea in mind of paying off their mortgage faster, remove the cost of FHA mortgage insurance or to find piece of mind by switching to a fixed-rate loan from an adjustable-rate note.

Borrowers can also seek relief from high rates to help them weather the storm caused by the COVID-19 pandemic.

When You Refinance a Mortgage

A refinance is simply a new mortgage and this new mortgage pays off the balance of your existing home loan.

In exactly the same way you obtained your original mortgage, refinancing calls for you to once again qualify for the refinancing loan. You’ll once again be required to meet a lender’s baselines for creditworthiness.

The steps are the same as well; you’ll file an application which will then go through an underwriting process. Once those hurdles are cleared, and you’ll go to a closing and sign the closing documents to finalize the details of the loan.

Reasons to Refinance

You’ll need to ask yourself some questions to determine whether or not refinancing makes sense for you and your finances.

The goal is to analyze the steps and costs of the refinance process start to finish. Here are a few solid reasons to consider refinancing:

• Cut out the cost of PMI or Private Mortgage Insurance. FHA mortgages often call for insurance, and this PMI represents a considerable expense. It can be canceled on conventional home loans, but not for FHA in most cases. There’s only a couple of ways to remove the cost of insurance on FHA mortgages; sell the home or refinance the loan. And to refinance, you’ll need to pile up equity. To arrive at your equity, simply estimate the values of your home and then subtract the remaining balance of your mortgage.

• Cut down on your monthly payment. To make that happen, you’ll need to refinance your loan to one with a lower interest rate. You may also consider stretching out the terms of the loan. Extending the term of the loan from 10 or 15 years to 30 years – while it will lower your monthly outlay – will require you to pay considerably more interest over the long haul.

• Tap equity you have in your home. Refinancing can allow you to borrow more than you owe on your current mortgage, and lenders may hand you a check for the difference. This is known as a “cash-out refinance’ and it may well come with the added benefit of a lower interest rate. That depends, of course, on current market conditions and rates.

• Discard unfavorable terms. You may be able to ditch an adjustable rate mortgage in favor of a more predictable fixed-rate loan. While interest rates for adjustable-rate mortgages can bring some nasty surprises such as a hike in rates and your payment, fixed-rate loans stay predictable.

Terms to Consider

Reducing your payment is likely your goal and you might be considering simply signing on for another 30-year term.

But you do have another option.

You may ask your prospective new lender if they can match the remaining loan term. Say you have 22 years left to pay on your current mortgage. Ask your new lender to set the term of your new loan for 22 years rather than a full 30 years. These terms will save you money in mortgage amortization charges.

Use Our Refinance Calculator

It works like a dream. You input your payment information – both for your current mortgage and for the new mortgage terms – and the calculator puts out your new payment, savings per month, and any savings you might get over the lifetime of the loan. Our calculator also helps you estimate the up-front costs incurred as a result of your refinance.

What you’re looking for here is discovering the point at which you’ll recoup the cost of a new mortgage. It takes into account fees associated with refinancing, and they can run into thousands.

The Federal Reserve offers some useful tips here:

https://www.federalreserve.gov/pubs/refinancings/

You’ll need to find the best refinance rates, and we have you covered there. Doing your homework here will pay dividends as well. We’ll help you find the best refinance rate from a number of potential lenders.

David Goodman

By David Goodman

David is the Vice President of Operations for BanksBestRates.com.

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