How Refinancing Your Home Works

How Refinancing Your Home Works

About Refinancing

If you find that you are having problems making the payments on your mortgage, due to higher interest rates, the type of mortgage you have, or other personal financial issues, it may be time for you to consider refinancing.

In a nutshell, refinancing is the process of getting a new mortgage to replace your original one. The mortgage lender pays off the first loan and replaces it with the new one rather than creating the new one and eliminating the first one.

If you have good credit history, then refinancing allows you to get a better interest rate on your mortgage, change your loan from an adjustable rate to a fixed rate mortgage, or change the term or even the balance of your loan. You can refinance using your existing mortgage lender or choose a new one, depending on what you want to achieve and who is able to help you get

Types of Refinancing

There are three main types of refinancing:

  • Rate and term refinancing: This is the basic type of refinancing where your original mortgage is replaced with a new one without increasing the amount of your mortgage. Borrowers can get this type of refinancing to take advantage of lower interest rates, change to a fixed rate mortgage, reduce the term, or consolidate loans. It can help borrowers pay off their mortgage faster or with lower payments.
  • Cash out refinancing: This type of refinancing allows borrowers to extract some of the equity in their home in exchange for a new, yet bigger, mortgage. Keep in mind that the borrower can still take advantage of lower interest rates and have extra cash on hand from this type of refinancing. Also remember that you will need to repay the equity you received in the form of your bigger mortgage.
  • Cash in refinancing: As the name indicates, cash in financing is the exact opposite of cash out financing. Instead of taking out equity, you are putting more equity into your home. This helps reduce the balance of the mortgage and the interest owed over the life of the mortgage. Additionally, a cash in refinance can also allow home owners to eliminate the need for private mortgage insurance by lowering the loan-to-value ratio to a level where the insurance is no longer needed. As with the other two types of refinancing, you can still get a better interest, change the type of mortgage, and alter the length of the mortgage as needed.

Should You Refinance?

If you need money or want a lower interest rate, you may think, “Why not refinance?” You have to make sure that refinancing is in your best financial interest. First of all, it costs to refinance – after all, you are, in essence, getting a new mortgage. And that means home appraisal costs, loan origination fees, closing expenses, just to name a few.

Also, you need to make sure that your numbers add up. For example, if you are hoping to get a better interest rate, do you know if your savings on the interest rate will eventually offset the costs of refinancing? If you are choosing a cash out refinance, do you really need that money, and are you able to afford the increase in your mortgage comfortably, both monthly and across the life of the mortgage?

Finally, if you do not plan on staying in your home for long-term, you may not recoup your costs, even if with a lower interest rate.

Your Next Move

Although the prospect of saving on your mortgage or having extra cash is exciting, don’t be ruled by your emotions. You will need to expend time, effort, and money to refinance. If you do your homework and make an informed decision, refinancing can be a great way to come closer to financial freedom.


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