What Is Refinancing A Home?
Thinking about refinancing your home mortgage? For many people, refinancing makes sense. It’s a great way to help you get closer to goals, whatever those happen to be. To help explain that a bit more, let’s talk about what refinancing is, why people refinance, and your next steps.
When you refinance your home, you essentially do 3 things:
- Apply for a new mortgage for your home
- Use the funds from your new mortgage to pay off your old loan
- Pay down the new loan each month
Yes, you’re replacing one loan with another. In a way, it doesn’t seem to make sense. What’s the point?
It depends on what your current financial goals are. For some people, it may be better for them to keep paying down their current mortgage. But if you have some of the goals listed in the next section, refinancing is worth checking out.
Should I Refinance My Home?
Nobody can tell you what you need to do. That said, it’s a good idea to think about the benefits of refinancing a house and how they tie to your current financial goals to help you decide.
Here are a few reasons why some people choose to refinance their home.
Debt Management – Mortgages usually have fairly low interest rates. Someone with a lot of higher interest debt may choose to refinance their home and apply the cash they receive towards paying off credit cards.
Remove Mortgage Insurance Premium (MIP) – MIP is very similar to Private Mortgage Insurance (PMI), but is only applicable to FHA-backed loans that are taken out with down payments of less than 20%. Many people with FHA loans later choose to refinance into a private mortgage. If you refinance and have enough equity vs. the mortgage, you can get rid of this fee.
Pay Off Your Loan Faster – Some people decide they want to pay off their home more quickly. You can refinance and drop the terms of your loan, for example going from a 30-year loan to just 20 years. This may increase your monthly payment, but save you thousands of dollars in the long term.
Switching from Variable-Rate to Fixed-Rate – Variable-rate mortgages have their place, but many people are wary of them. The problem is your monthly payments can soar if interest rates climb. Some people try to get out of these mortgages, and refinancing into a fixed-rate loan is one option.
Lower Your Monthly Payment – Have a lot of equity in the home but your payments are too high? You can choose to refinance your home to lower the monthly payments. Just keep in mind this usually means extending the length of your loan, so it will take longer to fully own your home.
How Do You Refinance Your Home?
Refinancing your home is similar to applying for a regular mortgage. You start by finding a lender and getting pre-approved for the new mortgage. A pre-approval simply means the lender has reviewed the potential buyer’s credit score and taken steps to verify the documentation to approve a specific loan amount. Final loan approval occurs when the buyer has an appraisal done and the loan is applied to a property. A pre-approval is not a commitment from the lender to provide the loan, but it is an important step that helps prepare the buyer and lender for their next steps in the process. You’ll need provide the lender with the proper documentation they’ll need to secure the loan. This documentation includes things like current assets, debt and income.
Once the lender approves and gives you the loan, your old mortgage is paid off and you begin paying down the new one. If you had chosen to withdraw any cash based on your home equity, that cash gets sent to you.
Are You Ready To Refinance Your Home?
Our loan office has helped countless people refinance their homes and get closer to their financial goals. It’s rewarding for us, as we get to see the positive impact it can have on someone’s life. Have questions or need more info? Contact us today! We’d love to sit down for a few minutes for a free consultation on which type of mortgage we recommend.