Mortgage refinancing first steps and how to start
A refinance can change the basic terms of the mortgage–for example, it can convert a 30-year fixed loan to a 15-year fixed one. Most refinances, however, are attempts by consumers to save money as interest rates fall. Let’s talk about Refinancing your existing Home loan.
What Is Refinancing?
Getting a new mortgage to replace the original is called refinancing. Refinancing is done to allow a borrower to obtain a better interest term and rate. The first loan is paid off, allowing the second loan to be created, instead of simply making a new mortgage and throwing out the original mortgage.
Why people Refinancing their Home loan?
Typically people refinance their mortgage rate in order to take advantage of lower mortgage rates. Average national mortgage rates have been at historic lows. Even if you have little equity or are underwater on your mortgage, you still may be able to take advantage of special refinance programs being offered and lower your mortgage rate significantly.
Before you undertake these steps, you need to answer the question: “Should I refinance?” Here are some of the most common reasons to refinance.
- Pay less over the life of the loan
- Reduce your mortgage payment
- Trade home equity for cash
- Drop mortgage insurance coverage
- Get better loan terms
What I Should Know Before Refinancing?
For borrowers with a perfect credit history, refinancing can be a good way to convert a variable loan rate to a fixed, and obtain a lower interest rate. Borrowers with less than perfect, or even bad credit, or too much debt, refinancing can be risky. One of the main advantages of refinancing regardless of equity is reducing an interest rate. Often, as people work through their careers and continue to make more money they are able to pay all their bills on time and thus increase their credit score. With this increase in credit comes the ability to procure loans at lower rates, and therefore many people refinance with their mortgage companies for this reason. A lower interest rate can have a profound effect on monthly payments, potentially saving you hundreds of dollars a year.
Questions to Ask Before Refinancing?
- Is there a prepayment penalty on my current mortgage?
- What are the costs of the new mortgage?
- Will my tax savings be reduced?
In general, if you can lower your monthly mortgage payment and offset the costs of refinancing in a reasonable time frame, you should consider refinancing.