Mortgage Refinancing

Mortgage Refinancing Topics Covered

The Mortgage Refinancing Process

Refinancing your mortgage involves replacing your current home loan with a new one, typically to secure better terms. Here’s a breakdown of the process:

Prepare Your Credit
Start by addressing any issues with your credit to ensure your credit score is as high as possible. A higher credit score increases your chances of qualifying for lower interest rates. Having a rough idea of the interest rates and terms you want in your new loan can help you make a more informed decision.
Shop Around for Lenders
Don’t automatically go with your current lender. Compare offers from at least three or four different lenders to ensure you’re getting the best deal. Look for the best rates, terms, and overall cost of refinancing.
Avoid New Credit Applications
During the refinancing process, avoid opening new lines of credit. New credit inquiries can negatively impact your credit score, making it harder to secure a good refinancing deal.
Review Loan Terms and Fees
Before you commit to refinancing, carefully review the new loan’s terms and any associated fees. Ensure that the new terms represent a clear improvement over your current loan, whether through a lower interest rate, shorter loan term, or lower monthly payments.
Watch Out for Closing Costs and Prepayment Penalties
Refinancing comes with closing costs. Be sure to factor these into your decision-making. Additionally, be aware of prepayment penalties. These penalties could be applied if you decide to pay off your loan early or refinance again before the loan term ends. Make sure these penalties don’t outweigh the benefits of refinancing.

Reasons to Refinance a Mortgage

Lowering Your Monthly Payment
Refinancing into a loan with a lower interest rate or a longer loan term can help lower your monthly mortgage payments. Keep in mind that extending the loan term may mean paying more interest in the long run, though it can provide immediate financial relief.

Paying Off the Loan Faster
If your goal is to pay off your mortgage sooner, refinancing to a shorter loan term can help. While this will typically increase your monthly payments, it can reduce the amount of interest paid over the life of the loan.

Getting Rid of FHA Mortgage Insurance
If you have an FHA loan, you may be paying mortgage insurance premiums (MIP), which can’t be canceled like private mortgage insurance (PMI) on conventional loans. You can eliminate MIP by refinancing your FHA loan into a conventional loan once you’ve built enough equity in your home (calculated by subtracting your mortgage balance from your home’s estimated value).

Cashing Out
If you have substantial equity in your home, a cash-out refinance allows you to tap into that equity. You can use the funds to pay off bills, finance large purchases, or even buy out an ex-spouse in a divorce, depending on your needs.

Switching from an Adjustable Rate to a Fixed Rate Loan
If you have an adjustable-rate mortgage (ARM), your interest rates could increase over time, causing your monthly payments to rise. Refinancing into a fixed-rate mortgage ensures your interest rate stays the same, offering more financial stability and predictable payments.

Consolidating Debts
If you have multiple loans or high-interest debts, refinancing your mortgage can provide an opportunity to consolidate these debts into one loan. This simplifies your finances, as you’ll only need to manage one payment rather than multiple.

Different Types of Mortgage Refinancing

Rate-and-Term Refinance

Goal: Change the interest rate, loan term, or both, without altering the loan amount.
Best For: Homeowners looking to lower their monthly payment, switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or shorten/lengthen the term of their loan.
Pros: Can lead to significant savings on interest or more predictable payments, especially if switching from an ARM to a fixed rate.
Cons: No cash is obtained in this type of refinancing.

Cash-Out Refinance

Goal: Tap into the equity in your home by refinancing for a higher loan amount and “cashing out” the difference.
Best For: Homeowners who need cash for purposes such as home renovations, paying off debt, or funding other large expenses.
Pros: Provides immediate access to cash, which can be useful for large purchases or debt consolidation.
Cons: Involves a higher loan amount, which could increase monthly payments and interest rates. This type of refinance may also extend the length of your loan term.

Cash-In Refinance

Goal: The homeowner refinances and brings cash to the table to reduce the balance of the loan.
Best For: Homeowners who are underwater on their mortgage, want to eliminate private mortgage insurance (PMI), or qualify for a lower interest rate by reducing their loan balance.
Pros: Can reduce the loan balance, resulting in lower monthly payments and the potential to eliminate PMI. It may also help homeowners qualify for a better interest rate.
Cons: Requires the homeowner to have available cash to pay toward the loan, which might not be feasible for everyone.

Frequently Asked Questions

What’s the difference between pre-qualified and pre-approved?

Pre-qualification: A basic assessment of how much you might qualify for based on your financial situation, usually done through an interview with a loan officer. It’s less formal and doesn’t involve a credit check or in-depth verification of your financial history.
Pre-approval: A more rigorous process where you submit an application, undergo a credit check, and provide financial documents (such as income verification). Pre-approval is stronger than pre-qualification and can help you close faster and negotiate better terms.

What are points?

Points are fees paid upfront to reduce your mortgage interest rate. Each point is equal to 1% of the loan amount. Paying points lowers your monthly payment, but it increases your upfront costs. The number of points required will depend on the loan type and interest rate you’re seeking.

If my credit score is low, how can I raise it?

Pay your bills on time
Reduce your credit balances
Avoid applying for new credit too frequently

These steps can help improve your FICO score over time, potentially qualifying you for better loan rates.

What’s a rate lock?

A mortgage rate lock is a commitment from your lender to hold a specific interest rate and points for a set period, usually 10 to 60 days. This protects you from interest rate increases before you close on your loan. However, if rates drop, you may miss the opportunity to secure a lower rate.

Mortgage Refinancing