You may be wondering what it means to refinance, the benefits of refinancing, and what different refinancing options are out there. Check out this quick article to learn more!
Key takeaways
- Refinancing replaces your current home loan with a new one for lower payments, interest rates, term, or equity access.
- Options include changing from ARM to fixed loans, shortening/lengthening term, or getting a cash-out refinance.
- To get approved, qualify the same way you did for the original loan and consider a streamlined refinance for faster approval.
- Shop around for rates and fees, get a second opinion, and consider working with the same lender who helped with the original loan.
- Speak to a mortgage professional to help you choose the best course of action.
Refinancing: Introduction
Refinancing your home mortgage means converting your current home loan into a new one.
After buying your home, circumstances may change.
The market can change, your life circumstances or finances can change. Therefore, it might make sense for you to change your mortgage along with that, so you can get more benefits out of homeownership.
There are several reasons why someone may choose to refinance. Benefits can include reducing your monthly mortgage payments, getting a lower interest rate, shortening the term of your loan, or tapping into your home’s equity.
Different refinancing options
To better understand refinancing, it’s helpful to look at different examples of refinancing options. For instance:
- Current FHA mortgage holders may choose to refinance into a different type of mortgage so they can get rid of mortgage insurance fees.
- If you have a 7-year adjustable-rate mortgage (ARM), you may refinance your ARM loan into a fixed loan, so that your interest rate doesn’t go up at the adjustment period.
- You may currently have a 30-year fixed-rate loan, then choose to refinance into a 15-year fixed-rate mortgage so you can shorten the term of your loan.
- If you’re currently on a 15-year mortgage, you can refinance to a 30-year mortgage. This lengthens the term of your loan but reduces the monthly payments.
- Tapping into your home’s equity: You may choose to refinance for more than what you owe on your current loan. In this case, you’ll receive a check for your home’s equity. This is called a cash-out refinance. Oftentimes, people can get the cash-out in addition to lower interest rates on their loan.
What are some of the reasons why homeowners choose to refinance?
Getting a lower interest rate.
Let’s say the market interest rates have dropped and you want to take advantage of that. You might be able to refinance your current mortgage to get a lower interest rate.
Eliminating your mortgage insurance fees.
If you have an FHA loan and are paying a monthly mortgage insurance premium (MIP), you may be able to refinance into a different type of mortgage to get rid of your MIP.
Lengthening the term of your loan to lower your monthly payments.
Some homeowners may currently have a 15-year loan and choose to refinance to a 30-year loan term. This would lengthen the term of your loan, so it would take longer to pay off your mortgage, but the benefit here is reducing your monthly payments.
Shortening the term of your loan.
Another reason why people refinance is to actually shorten the length of their mortgage.
Let’s say you started off with a 30-year loan, you could potentially refinance that into a 15-year loan, which would shorten the length of time it’d take for you to fully own your home, and also reduce how much you pay in total interest over the life of your loan. Keep in mind, though, that shortening your loan term might increase your monthly mortgage bill.
Tapping into your home’s equity.
Some homeowners choose to refinance for more than what they owe on their current loan and take out the difference and receive a check for their home’s equity. This is called a cash-out refinance.
Common reasons why homeowners choose to do a cash-out refinance include: paying off high interest credit card debt, or investing in other assets such as additional real estate, home renovations, or for major life events like weddings or their kids’ college tuition.
Changing from an adjustable rate to a fixed rate mortgage.
If you have an adjustable-rate mortgage or “ARM”, you may be able to refinance your ARM loan into a fixed loan, so that your interest rate doesn’t go up at the adjustment period.
Can I get more than one benefit out of my home refinance?
Depending on your situation, you may be able to get more than one benefit from your refinance.
For example, you may be able to refinance both to get a lower interest rate AND to tap into your home equity.
But the reality is that refinancing your home can be a complicated transaction, and it’s not one to take lightly. There’s a lot of strategy that goes into it, with a fair amount of cost-benefit analysis to help you make the best refinancing decision for you.
Think deeply about your “why” for refinancing. What are you looking to accomplish? How will your refinance goals have a real, tangible, net benefit on you and your family’s lives?
This is why it’s so crucial to work with a trusted mortgage advisor who takes the time to really understand your personal and financial situation. A mortgage advisor who truly understands your refinance goals is going to be more likely to help you get the best deal possible on this transaction.
How to get approved for a refinance
You still need to qualify for the refinance the same way you had to get approved for the original loan. This means submitting an application with a mortgage lender, going through the underwriting process, having your credit pulled, submitting documents, and paying closing costs (refinance closing costs may vary between 2% to 5% of the loan amount).
In certain cases, you may be able to opt for a “Streamline” refinance. This “streamlined” option has a faster approval process and doesn’t require you to provide as many documents.
Choosing a mortgage lender to help you refinance
When choosing a mortgage lender to help you refinance, it’s best to get a second opinion. Rates and fees can vary from lender to lender.
You might consider reaching out to the mortgage lender who helped with your original loan. Working with a mortgage professional who already has a good understanding of your situation can make the process run more smoothly.
Talk to your mortgage advisor or lender about your “why” for refinancing. What benefits are you looking to get from this transaction? How will those benefits create a real, tangible, positive impact on your life and your financial future?
Keep in mind that a great mortgage advisor isn’t just looking at the numbers on a piece of paper. They’re seeking to understand how those numbers will make a real impact on your daily life.
A great mortgage advisor or lender should help you carefully weigh the costs versus the benefits of refinancing your home, giving you peace of mind knowing that you’re getting the best deal possible on this transaction.
