Mortgage refinancing: How to get started

Mortgage refinancing: How to get started

Mortgage refinancing is a simple, common process of replacing your existing mortgage with a new mortgage for the same property. The funds from your new loan are used to pay off your existing loan.

Deciding if or when to refinance isn’t always easy. You can save money every month, cut your overall interest costs over the life of your loan, or achieve other important financial goals. The shortcut to a faster decision is to focus on your reasons or goals for refinancing.

5 reasons to refinance your loan

Among the many reasons to refinance, here are five that may suit your situation:

1. Low rates or fees

If it’s lower than the current rate on your current mortgage, you may be able to save money by refinancing to a lower rate. Your monthly payments can also be lower.

A can help you estimate how much of your monthly payment can be used for principal and interest with a lower rate.

2. Change from adjustable to fixed or fixed to adjustable

A fixed interest rate protects you from rate fluctuations that could result in higher payments on a . An adjustable rate will give you a lower payment for an initial fixed period, after which your payment may increase as the rates increase.

3. Change your payment period

With a shorter term, such as 15 years instead of 30, your repayments will usually be higher, but you will have to pay less interest costs over the life of your loan. With a longer term, say 30 years instead of 15, your payments will usually be lower, but you’ll likely pay more in interest costs over the life of your loan.

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4. To stop paying for mortgage insurance

Some types of loans allow borrowers to cancel theirs if they have enough equity in their home. If your loan does not allow cancellation of mortgage insurance at any level of equity, you will need to refinance a new loan to stop paying it.

5. Addition or deletion of borrower

A change in personal or family circumstances, such as divorce or inheritance, may make refinancing necessary to update who is responsible for paying a mortgage loan.

A reason not to refinance

One chance you can not The only option to refinance is if you plan to sell your home in the next few years. In that case, the benefits of refinancing may not exceed the costs and time involved in completing the refinance process.

3 types of mortgage loans

In addition to your refinancing goals, you should consider what type of mortgage loan may suit your needs. Options include:

1. Rate-and-term refinance

A rate-and-term refinance occurs when your new loan amount equals the remaining balance on your current loan. Your rate, payment terms, or other aspects of the loan may change.

2. Streamline the refinance

A streamlined refinance occurs when you replace your existing loan with a new loan of the same type and the paperwork and documentation requirements are simplified.

Two types of loans that allow for streamline refinancing are , which are insured by the Federal Housing Administration (FHA), and , which are guaranteed by the US Department of Veterans Affairs.

3. Cash-out refinancing

A occurs when your new loan amount is higher than the outstanding balance of your existing loan and the difference is paid to you in cash. This type of refinance reduces your equity in your home, but allows you to use the money for home improvements or other expenses.

Costs to refinance your loan

Refinancing is not free. Examples of costs you may have to pay include appraisal fees, loan origination fees, and title search and insurance costs.

One type of fee you may encounter when you refinance is optional. This is called a “buy-down” and it is a form of prepaid interest. If you choose to pay it off, you should receive a lower interest rate for an initial period for your new loan.

Some borrowers choose to pay the refinancing costs up front in cash. Some prefer to keep the costs of their debt down through higher loan amounts or higher interest rates. Which options you choose may depend on how much money you have available.

Shop around to save when you refinance

Regardless of your reasons for refinancing, you should shop around and compare refinancing offers from multiple lenders to find the lowest rates available to you. The fees and charges you will be quoted will depend on your income, your credit score, the type of loan you want, your desired loan amount, and the current value of your home, among other factors.

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