Refinancing your mortgage can be a great way to leverage your home for investment. From cashing out the equity to removing someone from the mortgage terms, there are many reasons why you might want to refinance your home.
A mortgage refinance also offers a lot of different benefits, depending on how your financial situation and goals have changed since you first purchased your home.
What is Mortgage Refinance?
In short, refinancing a mortgage simply means replacing your existing mortgage loan with a new one. This includes a completely new set of agreements, and possibly new terms and interest rates too. The lender would use the new mortgage to repay the old loan.
When refinancing a mortgage, you can remove or add another person to the agreement, as is the case with divorces or combining assets.
In general, a refinance is beneficial for the borrower as it can offer lower monthly payments or interest rates, depending on what you’re looking for. It can also help you pay off the home loan sooner.
Benefits of Refinancing Your Home
ü Change Loan Terms
The main advantage of a mortgage refinance is to change your loan terms. This could be to shorten the term and save on interest in the long run, or lower monthly payments so that you can afford it easier.
ü Lower Monthly Payment
If you need to lower the monthly payment for your home loan, refinancing can be a great idea. Of course, note that this will lead to higher interest in the long run and a longer repayment term.
ü Better Interest Rate
On the other hand, you can enjoy a much lower interest rate when you refinance a mortgage. By shortening the mortgage term, it allows you to save thousands and more on interest.
ü Pay Off Mortgage Faster
If your income situation has changed since you first got your home loan, you can refinance it to get a shorter mortgage term. For example, from a 30-year loan to a 15-year loan.
ü Change Loan Type
Another good reason for refinancing is to change the loan type to one that suits your current situation more. Maybe you started with an adjustable-rate mortgage (ARM) and want to change to a fixed-rate mortgage because the rates now are lower.
ü Cash Out Home Equity
Opt for a cash-out refinance to do renovations, consolidate debt, or invest in other financial goals. This lets you take out some cash from your home equity and borrow it with lower interest than other types of loans.
ü Cancel Insurance Premium
It’s possible to refinance lender-paid home insurance once you pay 20% of the equity and remove the insurance premium.
ü Combine Two Mortgages
Did you know you can combine two mortgages into one loan for a lower rate? It’s similar to a cash-out refinance but you are maintaining your home equity. It’s also more convenient to handle a single monthly payment than multiple ones. After all, wise men say to kill two birds with one stone, right?
ü Remove Someone from the Mortgage
Common among divorced couples, you can use a refinance to remove someone who had initially signed the mortgage with you. This means they won’t be responsible for paying off the loan anymore.
How to Refinance Your Mortgage
A refinance follows similar steps to a regular mortgage, although it can be much simpler and takes less time, usually around 30 to 40 days.
Determine why you need to refinance. What’s the reason for wanting to refinance your mortgage? Is it to get a lower rate and pay off your loan faster? Or to cash out from your home equity? This will help you find the right terms and lender for the refinance.
Recheck your finances. Just like buying a home for the first time, you need to check your credit score and any relevant documents. Make sure that you also have the money to pay for the closing costs.
Apply for a refinance. In the application process, you’ll need to answer the same questions such as your income, debt, and assets. You may need to provide documentation like your paycheck or other income documentation and tax returns. We’d recommend comparing a few different lenders to find the best rate too!
Lock your interest rates. Once you’re approved, immediately lock in the mortgage rate so that it doesn’t change before you close the loan. Rate locks can last for 15 days and up to two months.
Home appraisal. Again, just like applying for the original mortgage, you need to get an appraisal. This will determine your home value, so it can be worthwhile to tidy up and make it look appealing. You can even list out any upgrades you’ve made to the home.
Close on your loan. You will receive a closing disclosure containing all the final numbers for your refinance. Submit all the necessary paperwork and sign the documents. Closing a refinance also takes less time than closing a purchase.
Getting the Best Refinance Rates
The number one trick to securing the best mortgage refinance rate is to compare, compare, and compare. This includes finding at least three new lenders so you can pick the one that gives you the best offer.
Spending some time to compare several lenders can end up saving you thousands of dollars in the end. But we’re not just talking about mortgage rates! You should also think about the terms and refinancing costs to find the best deal for you.
Types of Mortgage Refinance
This traditional refinance program allows you to change the mortgage rate and loan terms, which means you can lower the interest rate or monthly payment. The amount of money that you need to repay will usually stay the same.
A cash-out refinance gives you a higher mortgage debt but lets you cash out the difference so you can spend them now. Most people opt for this for things like home improvement and renovation.
Debt consolidation refinance
This one is similar to a cash-out refinance, but you’ll be using the cash to pay off other non-mortgage debts, like credit cards. Although your mortgage balance will be higher, you can still benefit because mortgage rates tend to be smaller than other loans.
This option is only for government-backed loans like FHA, VA, and USDA. It lets you speed up the refinancing process because there is no need for a credit check, income documentation, or appraisal.
Finally, the high-LTV refinance is designed for those who want to refinance their mortgage even when the loan amount is much higher than the home value. This is because conventional refinance programs won’t be available for this case.
The Risks of Refinancing
Of course, we don’t want to sugarcoat the truth and say that a mortgage refinance won’t come with risks.
The number one risk would be losing your home when you fail to repay the monthly payment because the amount has been increased from the original mortgage.
- Longer repayment term &higher total interest
If you decided to refinance to have a lower monthly payment, the trade-off would be an extended repayment term. This means you’ll have to pay off the mortgage loan for much longer. Likewise, this would also mean a higher total interest.
3. High closing costs
The one unavoidable disadvantage when refinancing your loan is the expensive closing costs. It can be especially risky if the cost is greater than the benefit you enjoy for choosing to refinance.
4. Less home equity due to splurging
If you’re choosing a cash-out refinance, make sure that you only use the cash taken from your home equity only for absolute necessity. Otherwise, you would be decreasing your home equity only for splurging.
Bottom line: Should You Get a Mortgage Refinance?
At the end of the day, refinancing your mortgage can be a wise decision to help you save money in the long run. It lets you change your loan terms, reduce interest rates, and shorten your pay-off period.
Are you ready to adjust your home loan? It’s time to dive deeper and understand all there is to know about a mortgage refinance. Improve your homeowning journey and let Fund Depot guide you!