What is a mortgage refinance?
Unsure if a mortgage refinance is the right step for you? Here's everything you need to know about refinancing mortgages, including what it is, when you should do it, and how to get started.
What you need to know about mortgage refinance
There is a lot of information about mortgage refinance, and it can take time to know where to start. Luckily, we’re here to help you!
This blog post will give you a basic overview of refinancing and how it can benefit you. So if you’re considering refinancing your mortgage, keep reading for more information.
What is a mortgage refinance, and how does it work?
The main concept of mortgage refinance is simple. It is when you take a new mortgage to pay for your old one.
The new mortgage will come with different repayment terms, lower interest rates, and monthly payments.
The application process is similar to a traditional loan. But instead of using the money to buy a property, you’ll use it to pay for your debt.
When you refinance, your new lender will use the loan amount to pay off what’s left of yours, and after closing, you’ll start with your new loan’s monthly payments.
As with any other financial product, mortgage refinance can be of great benefit to its borrowers. However, before deciding to apply, you must also consider its drawbacks.
Below, let’s compare the pros and cons of mortgage refinance to help you decide. Keep reading to learn more.
Benefits of refinancing your mortgage
There are a lot of benefits involving mortgage refinance. Firstly, it will help you save money.
By applying for a mortgage refinance, you can choose lower interest rates than you had in your old mortgage.
Mortgage refinance will also help your pay-off off your home quickly, eliminate mortgage insurance, and, with cash out, you can use your home equity for debt consolidation, for example.
You can also apply for new features when refinancing.
When taking a new loan, you can apply for different repayment terms, choose between fixed or adjustable interest rates, and even choose what you’ll pay in your mortgage closing costs.
Furthermore, you can save money on your taxes by deducting mortgage interest.
You can do it by combining other debt with your mortgage. But remember to consult a tax professional before doing this.
Potential risks and drawbacks of refinancing your mortgage
Refinancing is only a good idea for some. Before applying, you must consider your finances and the potential risks a mortgage refinance might have.
A mortgage refinance will indeed help you save money. However, it might be minimal if you consider the effort and length of time you’ll spend on the refinancing process.
Also, refinancing your mortgage could increase your monthly payments, especially if you shorten the repayment terms of your loan.
Additionally, refinancing a mortgage can reduce your home’s equity. And you’ll have to pay for the closing costs.
Does refinancing hurt your credit score?
Yes. A mortgage refinance can have an impact on your credit. Most lenders will run a credit check to decide if you qualify for a refinance.
Also, when refinancing, you are closing one loan and opening a new one. This will also have an impact on your credit history.
Usually, it will affect your credit score for a short period.
Also, most lenders make credit reports for the major credit bureaus, so your credit will increase if you make your monthly payment on time.
What is the cost of refinancing a mortgage?
Refinancing a mortgage can be a great way to save money on your monthly payments, but some costs are involved in this transaction.
The costs of refinancing a mortgage will vary depending on multiple factors. These costs will depend on the lender and the property value.
The most common refinancing closing costs are application fees, appraisal fees, and attorney fees. As a result, borrowers can expect to pay 2% up to 6% of the loan value.
The different types of mortgage refinance
If you’re considering applying for a mortgage refinance, keep in mind that multiple types are currently on the market. Let’s take a closer look at it.
When refinancing a home loan, borrowers will maintain the balance of what they currently own, but they can change the interest rates, loan terms, or both.
This types of mortgage refinance will help reduce rates and repayment terms. The main goal of rate and term refinance to help borrowers to save money.
Therefore, this will help you save on interest in the long term.
This type of refinance is a great way to take money out of your home and invest it in something with more potential.
The cash-out refinance, the new mortgage amount will be higher than the previous mortgage.
As a result, you’re taking cash out of the equity you have in your home to use for something else, such as consolidating debt. It usually offers a higher interest rate than a rate-and-term refinance.
In a cash-in refinance, the homeowner will put a lump sum of cash into the closing. This will help them pay their balance and lower the mortgage rate and terms.
This refinance type is a good way to eliminate your Private Mortgage Insurance and, as said, secure better interest rates.
If that is the case, a cash-in refinance would be a great choice if you have the cash to put in.
3 reasons why you should refinance your mortgage
You should refinance your mortgage for multiple reasons, but remember that you must consider your finances first.
Refinancing a mortgage requires work and time, so if you think it is worth it, you should do it. Below, let’s see three common reasons why people refinance their mortgages.
Lower the interest rates
This is one of the biggest reasons why people refinance a mortgage. So if the rates are lower now than when you got your loan, it is a great opportunity to save on interest rates.
This will directly affect your monthly payments since you’ll pay less interest throughout the loan.
Shorten your loan
Another common reason to refinance is to get a shorter loan term. As a result, if you had a 30-year term loan and can afford a higher payment, you can refinance for a 15-year term loan.
To get a different type of loan
Changing your loan type might benefit you in multiple ways. For example, you can change an adjustable-rate loan for a fixed-rate loan.
This way, you’ll be able to set your budget more easily since you’ll pay the same amount every month.
Refinancing can be a great way to use your home as a financial resource, especially if you want better conditions on your loan.
However, when is the right time to refinance a mortgage?
Don’t worry. The following article will explain everything you need to know about when to refinance your home loan. Keep reading to learn more.
About the author / Beatriz Vieira
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