Refinancing is the process of replacing your existing mortgage with a new loan. Often people refinance to reduce their interest rate, cut monthly payments, or tap into their home’s equity. Others refinance to pay of their loan faster (shorten the term) or to get rid of the FHA mortgage insurance.
How does refinancing work?
When you buy a home, you get a mortgage to pay for it. The money goes to the home’s seller. When refinancing a home, you get a new mortgage. Instead of going to the home’s seller, the new mortgage proceeds pay off the balance of the old home loan. Mortgage refinancing requires you to qualify for the loan, just as you had to meet the lender’s requirements for the original mortgage. You file an application, go through the underwriting process, and go to closing as you did when you bought the home originally.
Lower Monthly Payment
When your goal is to pay less every month, you can refinance into a loan with a lower interest rate. Getting a mortgage with a 1–2% drop in interest rate can make a huge difference in your monthly budget. Reducing your interest rate not only helps you save money, but it also increases the rate at which you build equity in your home.
Fixed-Rate or Adjustable Rate Mortgage (ARM)
While an adjustable rate mortgage (ARM) often starts out offering lower rates than fixed-rate mortgages, periodic rate adjustments can result in rate increases that are higher than those available through a fixed-rate mortgage. When this occurs, converting to a fixed-rate mortgage may result in a lower interest rate and eliminates concern over future interest rate hikes.
Conversely, converting from a fixed-rate loan to an ARM—which often has a lower monthly payment than a fixed-rate mortgage—can be a sound financial strategy if interest rates are falling. If rates continue to fall, the periodic rate adjustments on an ARM result in decreasing rates and smaller monthly mortgage payments, eliminating the need to refinance every time rates drop. It’s best to consult with a mortgage professional to help you understand the current market and future market expectations when deciding what type of mortgage is right for you.
Refinancing can add value to your home. When you refinance to borrow more than you owe on your current loan, the lender gives you a check for the difference. This is called a cash-out refinance. People often get a cash-out refinance and a lower interest rate at the same time.
Refinancing can be a smart financial move if it reduces your mortgage payment, shortens the term of your loan, or helps you build equity more quickly. Click here
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