Refinancing your mortgage means taking out a new loan that pays off the old one. While that may seem simple enough, there are several things to consider before deciding to refinance. Refinancing means you have a whole new set of terms and conditions, often with a new lender. While there are advantages to that, you must also consider the costs.

Understanding Mortgage Refinancing

When you refinance a home loan, you replace your current mortgage with a new one, often with better terms and conditions to meet your needs. Done at the right time and with the best available loan, you may be able to achieve one of your financial goals, such as lowering the loan's interest rate, taking money out of your home’s value to pay off other debt, or lowering your monthly payment.

When refinancing a home loan, you can negotiate many terms with your lender to better suit your needs. However, you should consider the following factors:

• Interest Rate: If market conditions or your credit score have improved, you might qualify for a lower rate.
• Loan Term: Extending the loan term can reduce your monthly payment.
• Cash Out: Some borrowers cash out their home's equity for debt consolidation or home improvements.
• Monthly Payment: Refinancing can significantly change your monthly payment, either increasing or decreasing it, depending on various factors.
• Amortization: Refinancing might significantly affect your home's overall cost if you extend the term or alter the interest rate.

Why Refinance Your Mortgage?

Before you decide to refinance your mortgage, carefully consider the benefits to you for doing so. Like all loans, there are costs involved, including application fees, appraisal fees, and closing costs. Some of the reasons to consider refinancing include:

• Secure a lower interest rate on the loan, potentially saving you money on the total home cost.
• Lowering your monthly payment.
• Using your equity to consolidate debt.
• Moving to a new lender that you prefer to work with.
• Shorten your loan term to pay off your loan sooner (if your existing loan limits your ability to do so financially soundly).
• Move from an adjustable to a fixed-rate loan.

These are just some of the reasons to consider refinancing. Still, evaluating the costs, benefits, and opportunities involved in the process is critical before doing so.

The Mortgage Refinancing Process

The mortgage refinancing process is much like obtaining a new loan because that’s what you do. For the process, you can use any lender, including a traditional bank, credit union, or specialized lender and broker. Here is what you can expect to happen:

• Determine what your goals are. Do you want to lower your monthly payment, pay off additional debt, or get a lower interest rate?
• Fill out an application for the loan. You must provide references, income, employment, and other data. Your lender will check your credit score to determine if you qualify.
• Determine what the lender can offer you and how well that meets your financial goals, including the monthly payment and total interest cost.
• Have the home appraised. It will determine how much you can borrow. Lenders typically lend up to 80% and sometimes more.
• Factor in closing costs or the fees associated with borrowing money for the loan. These typically are between 5 and 7% of the loan’s value.
• Obtain approval of the loan from the underwriters, provide the closing cost and other fees required, if any, and then sign your new paperwork.

Pros and Cons of Refinancing

The benefits of refinancing include:

• You may be able to lower your mortgage payment and sometimes the interest rate paid, which could mean significant savings.
• It may be possible to use the extra funds from the loan to meet other financial obligations like consolidating your other debt.
• You could choose a shorter term and pay off your loan faster, sometimes even with a lower interest rate.

The disadvantages of refinancing a mortgage could include:

• The term resets, and in some cases, that means you’ll be paying off the loan longer and ultimately spending more on interest.
• Interest rates are not always lower than existing loans, depending on factors such as your qualifications and market changes.
• If you decide to shorten your loan term, that may mean your monthly payment will go up.

Understanding Rates, Loan Terms, and Fees

When considering refinancing your mortgage loan, carefully consider the following:

• What is the available rate based on your credit qualifications? Is that rate lower than what you are paying now?
• What is the length of the new loan? How much longer does it extend the repayment period for you? How does that impact how much you will ultimately pay in interest to buy your home?
• What fees are involved, including appraisal, closing, and other out-of-pocket costs?

Alternatives to Refinancing

If you’re not sure you wish to refinance, consider the following alternatives:

• Use a home equity loan to obtain a loan just on the available equity in your property.
• Consider working with a debt consolidation specialist to reduce your loan payments.
• If you want to pay off your loan faster and for less, aim to make additional payments each month or pay your loan every two weeks instead of every four.

Takeaways

Mortgage financing is an opportunity to obtain a new loan if the one you have right now is too expensive or no longer fits your financial needs. Carefully consider the costs and availability of these loans before deciding to invest in them.