All You Need to Know and What your Brokers won’t tell you about Mortgage Refinancing.
Financial decisions as crazy as they may seem to third parties are done for various reasons. Homeowners have those personal and urgent reasons as to why they decide to refinance their mortgage. A mortgage is a loan taken to fund a house for which the house itself serves as collateral for the loan.
Refinancing a Mortgage is done because the homeowners seek a lower interest rate aside from the one they got from the actual mortgage. Refinancing a mortgage is also done to shorten the term of the refinanced mortgage and to raise funds for financial emergencies.
As we proceed, we would take you through a journey of what a mortgage refinancing is and the necessary details for a smooth process should you decide on refinancing.
What Does it Mean to Refinance a Mortgage?
Refinancing a mortgage is simply a means by which you trade your old mortgage for a new one which results in you having a new balance. To refinance is to get a new lender to pay off your old loan, which makes you indebted to the new lender.
You pay off an old mortgage with a new one, this would make you get a new principal and interest rate. When a mortgage is refinanced, you are not indebted to the former lender because he is paid off by the new lender.
Also, read Your Credit Score and Its Significance.
How Does Mortgage Refinancing Work?
Like any financial decision, it is a necessity to understand the process of mortgage refinancing. The process of refinancing a mortgage is often said to be easier and less complicated than getting an actual mortgage. Although still involves a similar process of carefully searching for the best credit offer.
After your first mortgage experience, if your credit score has improved (this is because you didn’t default on your payments for the old mortgage), you will stand a chance of getting better loan terms. You should however still pay very close attention to the closing costs and prepayment penalties which we will see later in the article.
Benefits of Refinancing a Mortgage
The most advertised advantage of refinancing a mortgage is that it helps you save thousands on your mortgage repayments. The benefits of refinancing a loan are beyond the money you will save in the process, we will carefully list out some more advantages that may convince you to apply for refinancing.
Benefits of a refinanced mortgage include:
- Reduction of your Mortgage Balance: When your mortgage is refinanced, you get a reduced total mortgage and interest. This empowers you as both a homeowner and borrower.
- Released Equities: The shorter your interest rates, the lower your full loan balance, and this ultimately releases more equities for you. With more Equity in your hands, you can fund other property investment opportunities or a separate need in the home.
- Save your Home: There may be some unplanned events that may threaten to cause a default in your mortgage repayments. You can save yourself from losing your phone because of default by refinancing your mortgage.
When is it Worth Refinancing a Mortgage?
There’s a huge difference between knowing how to plant and when to plant. Due to the delicate situations surrounding the refinancing of a mortgage, it is safer for one to know when exactly one needs to refinance a mortgage.
Before refinancing your mortgage, you should consider mortgage rate trends, the value of your home, and your credit score among others. All of these factors help to determine if your decision to refinance your mortgage is a suitable one and won’t put you in a rather worse financial state.
Scenarios to Consider
Refinancing your mortgage will be an excellent choice if it indeed makes sense to your finances and saves you from financial difficulty. There are several scenarios to consider before applying for mortgage refinancing:
- Reduction in Mortgage Rates: It will be an excellent time for you to consider refinancing when the general rates for a mortgage are down. Market movements, government policies, inflation, and much more are factors that can affect mortgage rates. This would have you pay attention to the mortgage market more than anything. When the rates fall, you would be able to save because the interest rates will be lower. You should carefully calculate the total financial decision before going for it.
- Improved Credit Score: Credit score is the most important factor in interest rates when getting a mortgage or any loan at all. The better your credit score, the lower the rates you’ll be given. You can apply for refinancing when your credit score has improved. You should not apply for refinancing when you already got a prepayment penalty.
- Use of Adjustable-Rate Mortgage: With the increase in mortgage rates, you may consider refinancing and converting your rate from ARM(Adjustable Rate Mortgage) to a Fixed-rate mortgage. This is advisable because when rates are increasing, your interest rate will also increase with ARM which increases your indebtedness.
Also, read All you Need to Know about Car Financing.
Options for Refinancing a Mortgage
Refinancing a mortgage is a credible way of achieving your financial goals and it comes in different options to fit into your financial needs. Your distinct financial goal should determine the type of refinancing you should consider.
- Cash-out Refinance: With cash-out mortgage refinancing, your old mortgage gets replaced with a new one that is on a different term. In this option, you take a loan that is more than what you owe of which surplus you receive in cash.
- Cash-In Refinance: For a cash-in refinance, you make a larger payment to your new lender to reduce the principal balance of your loan. All of this is to increase equity in your home. For instance, you may owe $200,000 and the value of your house is $220,000. You can pay a principal of $40,000 to reduce your principal and increase the equity you have in your home.
- Rate-and-Term Refinance: This is defined as the usual refinancing method. You get a new mortgage to replace the actual mortgage on a new term. Your term length may change, and interest rate and repayments will also change.
- No-Closing Cost Refinance: This option allows you to refinance with new interests and terms like in rate and term refinance but saves you from paying a huge sum at closing. The closing cost is rolled into other charges that you pay during your repayments.
Cost of Refinancing a Mortgage
Having established how a mortgage works and the available options to suit your financial capacity, you should know the estimated cost. The size of your loan and your location are one of the basic determinants of your cost of refinancing.
Refinancing can be costly but worth it in the end. You are expected to pay about 2-5% of your total loan amount. While refinancing, you will be expected to pay closing costs which include other fees. The refinancing fees include the Loan Origination fee which is about 0.5-1.5% of your loan amount. This is also called underwriting.
During refinancing, expect to pay an appraisal fee which is done to determine the value of your property. This could be between $300-500. You would also need to get new title insurance, credit report fees, prepaid interest charges, mortgage points, and so on. All these costs are determined by company and location.
Refinancing a Second Mortgage
A second mortgage is a mortgage you take apart from your primary mortgage on your property. Refinancing of a second mortgage is done majorly by either combining both mortgages into one mortgage or by refinancing just the second mortgage. You would need to have over 20% equity in your home for successful refinancing.
Steps in Refinancing a Mortgage
There are steps involved in the successful run of mortgage refinancing. We will be looking at each one briefly.
- Decide your motive for getting refinancing. This could be either to pay off the loan quickly or to take a lower interest rate.
- Carefully access your financial capacity. Just like in the process of getting the actual loan, you should have a great financial profile because your new loan company will go through it. Check out the equity you have acquired on the house. This is determined by calculating the value of your home and how much you still owe in the mortgage.
- You should carefully search for the best rates available in the mortgage market.
- Apply for mortgage refinancing with various lenders. Do not limit your application to just a few lenders, extend your reach to find the best.
- Carefully select the best lender and refinance term that suits your financial capacity.
- Have an appraisal of your home to ascertain the value.
- Close on the loan.
No Closing Costs Mortgage Refinancing
This is a type of refinancing where no closing costs are paid upfront to get the new loan. They are however absorbed into the loan or calculated as higher interest rates. You get to be free from the burden of paying a large sum as a closing cost.
It is said to be suitable for those who won’t want to stay in the home for long because it may cost more overtime during repayments.
Refinancing a loan can be a great option for people who are seeking better mortgage options. Having understood the basics and options available for you, we hope you make a decision that favors your financial stand.
Before you go, read All You Need to Know About Car Financing.