Did you buy your house through a mortgage? What if you could cash out its value to pay for expenses you can’t afford? Or change to a new loan with lower interest rates? Refinancing makes these and other things possible.
Refinancing happens when a new mortgage loan pays your current one. It’s a process many homeowners go through to take advantage of the home’s new value or drop in interest rates.
Suppose you need $10,000 to pay for something, or the market changes and interest rates drop. Refinancing allows you to get the cash you need or change to a mortgage loan with a better rate. If you want to know which lenders can help you do these, visit Home Buyer Wallet.
CLICK HERE TO FIND REFINANCING OPTIONS
Refinancing is an excellent way to use the wealth you’ve built in your home over time and enjoy changing markets. So, instead of using your savings or paying the same high interest rate, why not try to refinance?
On to having money when you need it and changing mortgage rates!
Express Takeaways
- Refinancing is applying for a new mortgage loan to pay the current one.
- Refinancing allows you to pull out cash from your home’s equity or change the conditions of a mortgage loan.
- There are benefits to refinancing, but it does not apply to everyone.
- You may apply for refinancing with your current lender. You may also find a list of lenders in the Home Buyer Wallet and compare offers.
What is Refinancing?
Refinancing is replacing your old mortgage loan with a new one. Often, a new mortgage has lower interest rates, a shorter term, and a different loan type. It is also a way to cash out your home’s equity to have funds for many purposes.
1st: How Does Refinancing a Mortgage Loan Work?
The refinancing process is almost the same as how you applied for your old mortgage loan. You may discuss this with your current or a different lender and submit a new loan application.
If a lender approves it, they will pay your old mortgage loan leaving you with a new one. You will then start paying the new mortgage loan. It is according to the updated principal, term, and type.
2nd: What is an Example of Refinancing?
Suppose your house was worth $200,000 when you bought it with a mortgage loan. And now you have already paid $50,000 for it. So, the remaining balance to pay your mortgage lender is $150,000.
Situation A – you need $10,000 to pay student debt or other expenses
You may apply for a cash-out refinance by finding out first the equity you have in your home. It is the difference between the value of your home and the remaining balance in your mortgage.
You may apply to refinance if the equity is more significant than $10,000. A mortgage lender will pay the remaining balance of $150,000. Then, they will take a part of your home’s equity to provide you with $10,000 cash. Now, you have a mortgage loan with $160,000 to pay, the original remaining balance, and the $10,000 you took in cash.
Situation B – market conditions change and mortgage interest rates drop
Refinancing applies to those who want to start paying lower interest rates. A lender will pay the remaining $150,000 and leave you with a new mortgage loan. You will pay lower monthly mortgage payments since it has a lower interest rate.
Situation C – you want to change the term and/or the loan type
You may apply for refinancing if you’re going to change the following:
- Loan term to 15 or 30 years
- Rate to fixed or adjustable
- Loan type to conventional
A lender will pay the $150,000 remaining balance. Then, you will owe this lender $150,000 but at the new term, rate, or loan type you applied for.
3rd: What are the Reasons for Refinancing?
The example situations show that refinancing may help you to:
- Get cash from the equity you built in your home
- Lower interest rates and have you pay lower monthly mortgage payments
- If your financial situation changes, you may have the chance to adjust the length and type of your mortgage.
-Pay lower monthly mortgage payments with a longer-term
-Pay off your loan sooner if you choose a new and shorter-term
-Have peace of mind by paying for a fixed rate
- If you change to a conventional mortgage, stop paying mortgage insurance premiums. Many government-backed loans need it.
These benefits may encourage you to refinance as soon as possible. But, there are also drawbacks you may want to consider before making the move.
4th: What are the Drawbacks of Refinancing?
If you refinance, you may experience the following drawbacks:
- Rebuilding equity again. Since you will restart paying more of the interest instead of the principal
- Settling the prepayment penalty which lenders ask if you pay off your mortgage early
- Spending unnecessary costs for refinancing if you are planning to move soon
To avoid these, you should assess your situation first.
5th: When is Refinancing Not Ideal?
If you answer yes to the following questions, it may not be ideal to refinance:
- Will you move to a different house soon? You may not have the chance to recover the costs of refinancing.
- Is your home’s appraised value lower? You may not have enough equity to take cash out or find it challenging to find a better mortgage loan.
- Is your credit score lower? It may impact the costs of the loan. So, review the interest rates and terms of the new mortgage loan you plan to apply for.
- Do you have to pay the prepayment penalty? You may review your loan documents to see if the lender will request them.
If you are unaffected by these factors, consider different types of refinancing.
6th: What are the Types of Refinancing?
Lenders may offer the following types of refinancing:
- No cash-out or rate-and-term refinance – a new mortgage loan pays the remaining balance in your old loan. The new one has a lower interest rate, a new term, or a loan type. This is the most common type of refinancing.
- Cash-out refinance – taking out a part of the home’s equity and repaying it with a new mortgage loan. It also pays the remaining balance of the previous loan.
- Cash-in refinance: Some lenders allow borrowers to pay more of the remaining balance to decrease the loan-to-ratio value or lower monthly payments.
- No closing cost refinance – you will not pay a lender in closing the new mortgage loan. However, the lender charges the processing fees based on the interest rate you will pay over the life of the loan.
- “Rolled into” refinance – you do not pay a lender with the processing fees upfront since they add it to the loan amount.
You can start the refinancing process after selecting an ideal type.
7th: How Can I Start Refinancing My Current Mortgage Loan?
Refinancing when you need money is only possible if you have an existing mortgage. If you already have one, you may contact your current lender. If not, visit Home Buyer Wallet and choose from among the many companies. The website’s partner financial institutions accept down payment assistance (DPA). So, you can pay a little money upfront for a home. The small initial investment may help you with your financial problems in the future if you need it.
Refinancing is replacing your current mortgage loan with a new one. Its purpose is to pull out cash or change conditions. The cash comes from the equity you’ve built in your home over time. Changing conditions may mean lower interest rates, new terms, or different loan types. There are benefits and drawbacks to refinancing. So, make sure your financial situation may cope with the latest mortgage loan agreement. Refinancing may only help if you already have an existing mortgage. So, if you would like another source of cash when you need it, apply for a mortgage now. Home Buyer Wallet’s partner lenders accept down payment assistance (DPA). The programs allow you to pay little upfront to buy a home and build wealth over time. Visit the website and find a DPA program that is ideal for you. Who would have imagined homeownership and equity growth are now a click away?
Article Sources
Homebuyer Wallet requires its writers to get information from original and reliable resources. Please see our editorial policy to learn more about our standards for producing factual information and content.
- Consumer Financial Protection Bureau, “Should I refinance? https://files.consumerfinance.gov/f/documents/cfpb_should_i_refinance_handout.pdf”
- The Federal Reserve Board, “Refinancings, https://www.federalreserve.gov/pubs/refinancings/#consider”
- Freddie Mac, “Understanding your options, https://myhome.freddiemac.com/refinancing/options-for-refinancing”
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