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If you're considering refinancing your mortgage, here are some basics on what you need to know and a quick look at whether refinancing your mortgage is right for you. Refinancing is the process of paying off your existing mortgage with the funds from a new mortgage. Now, most people refinance to take advantage of a lower interest rate, but other reasons to refinance include switching mortgage companies, changing the length of your mortgage, sending a private mortgage insurance requirement.
Understanding the Process:
The process of refinancing is very similar to applying for a new mortgage. You'll need to contact a bank, a credit union or a mortgage broker to discuss your options. But in the interest of speed. An online lending marketplace such as LendingTree can help automate this process for you by reaching out to multiple lenders at the same time so you can see all your options at once. Now, there are a lot of confusing words and terms when it comes to refinancing, so you want to become familiar with what they mean, because many of these terms are key variables that you'll need to take into consideration. To determine whether a refinancing is a good idea. Let's take a look at some of the most important ones. Equity this is the difference between what your home is currently worth and the amount you owe on your mortgage. In other words, it's how much of your home you actually own.
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Key Terminology in Refinancing:
For example, if your home is currently worth$300,000 but you have $175,000 left to pay your mortgage, your equity is $125,000.Closing this is the very last step in a refinance. It's when you sign all the final legal documents accepting responsibility for your new mortgage. And it's when the funds from your new lender will be transferred to your old lender to pay off your existing mortgage. Closing Costs these are the fees you're charged to finalize a mortgage, whether it's for a new home or a refinance. Sometimes a lender might offer a no closing costs option, but you'll likely pay a higher interest rate for it. Your lender is required to disclose its closing costs at least three business days ahead of the closing in a closing disclosure. Points are optional fees you can pay to your lender to lower your interest rate, which will make your monthly payments smaller.
Determining if Refinancing is Right for You:
Each point typically costs 1% of your total mortgage amount and reduces your interest rate by a quarter point. So if you're refinancing a $200,000 mortgage at anew interest rate of 4.25%, you could pay $2,000for two points and reduce your rate to 3.75%.Cash out Refinance this is when you refinance for an amount higher than what you owe on your current mortgage and pocket the extra money.
This reduces your equity, but it allows you to get cash that can be spent on other necessities, such as home improvements, credit card debt, pretty much anything you want. Now, there are lots of benefits to refinancing, but they vary based on your personal situation and financial goals. Typically, the number one benefit is saving money. With a refinance, you can potentially get a better interest rate and lower your monthly payments. But there are other possible benefits as well you can shorten the length of your loan, consolidate other existing debts by combining them all into a new mortgage.
Benefits and Risks of Refinancing:
Get rid of your mortgage insurance if you have at least 20% in equity in your home, or even remove someone else from your mortgage.
But there are also potential risks to refinancing. First are the closing costs we talked about. While these costs can often be folded into your new mortgage, by doing so, your monthly payments will be higher. So make sure you fully understand these closing costs and take them into account to ensure that your monthly savings from a refinance will more than offset the expense.
Also, keep in mind that all mortgages are designed so you're paying more interest than principal in the first years of the mortgage. That means if you're starting a new mortgage with refinance, you'll be paying the bulk of the interest in the first years of your new mortgage after previously paying the bulk of the interest in the first years of your old mortgage.
Tips for a Smoother Refinancing Experience:
So here's a tip to minimize this problem if you're already more than ten years into a 30 year mortgage and you're considering refinancing, opt for a new mortgage with a shorter length. A 15 or 20 year mortgage will save you from having to pay a lot in extra interest.
Understanding the basics of refinancing will help you decide whether a refinance makes sense for you. But once you decide that refinancing is the right choice, the process can be quite straightforward if you know what you're doing and you'll be on your way to save money and hitting your personal financial goals.
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