Home Refinance: Everything You Need To Know About Mortgage Refinancing
Refinancing means exactly what it sounds like: to finance something again. Refinancing is the act of replacing an existing loan with a new one. When it comes to your mortgage, it’s the process of replacing your current mortgage with a new one with new terms or interest rates. Car loans, home loans, and student loans are all common types of loans for refinancing.
There are a few different reasons to refinance that can be beneficial to borrowers, as well as potential risks or costs that may make it less worthwhile. In order to get the most out of a this decision, it’s important to understand how it works, how long it takes, and when you should do it in order to reach the decision that makes the most sense for your financial health.
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What Is Mortgage Refinancing?
It’s important to note that mortgage refinancing means you’re paying off your old mortgage completely and replacing it with a new one. This is not the same as taking out a second mortgage on your home, which involves having two loans on your home at once. Refinancing is common whether mortgage rates are rising or falling, and you don’t have to stick with your original bank or lender for your refinance. Depending on your reasoning for refinancing, it may not be a smart decision to do so. It does come with associated costs, so you may need to weigh the numbers before choosing to refinance.
Why Refinance a Mortgage?
There are a few different reasons why a person might want to refinance a mortgage. Knowing whether or not you should refinance your mortgage loan will have a lot to do with weighing the pros and cons of cost and reward. Some refinance to get a lower interest rate than the one they had from their original loan, which is known as a “rate refinance.”
A “term refinance” lowers mortgage payments by refinancing for a longer term, though this will be more expensive in the long run due to interest payments. Some refinance to change their mortgage from an adjustable rate to a fixed rate so that the interest rate never changes. Some refinance to get rid of private mortgage insurance (PMI) premiums associated with an FHA loan.
Another similarity between second mortgages and refinancing is the cash-out refinancing option. Cash-out refinancing replaces your original mortgage, so you still retain one loan. After your original mortgage is paid off, you receive the remaining equity in cash, similarly to taking out a home equity loan. Taking out a second mortgage basically offers you an additional loan with your home’s worth as collateral.
How Does Refinancing Work With Home Loans?
Refinancing is an in depth process that involves a lot of homework and lender discussion, not to mention costs. However, the end result can be worth the work.
Do your Homework
You’ll want to determine why you want to refinance and think about the long and short term pros and cons of your decision. Understand that your credit score is important in getting another loan and maintaining a lower interest rate on your refinancing. Research the value of homes like yours in your neighborhood and consider any upgrades you’ve made. Shop for mortgage rates online and decide the lender you’d feel the most comfortable with going with.
Talk With Your Lender
Whether you go with the same lender as your initial mortgage loan or not, you’ll want to discuss rates and finances with the lender of your choice. Talk with your lender about your overall goals, any costs, and the positives and negatives of refinancing. Look into your closing disclosure for your initial mortgage loan and read through your initial loan terms, monthly payments, and fees to make an accurate comparison with your refinanced loan.
Discuss Your Costs
There are loan application fees, appraisal costs, and a whole slew of additional fees when it comes to paperwork with a refinancing option. Your lender should have a close approximation of fees for you to consider when discussing a refinance. There will also be property taxes, insurance, and closing costs. If you are going with a different lender, you may have a lot of duplicated closing costs you already paid when you closed on your home which is why it can be helpful to stick with the same lender.
Compile Your Paperwork
Your lender may need a credit report, statements, pay stubs, etc. during the process of refinancing. Some of that will be done by the lender, but others may need to be gathered by you. Again, your lender should be able to help you with discussing your goals, your costs, the paperwork you’ll need, and whether or not refinancing makes sense for your goals. You won’t be on your own during a refinancing process.
How Long Does It Take To Refinance a House?
Just like the timeline of closing on a home, there are a variety of different things that can impact the timeline of refinancing your home. The timeline for refinancing will vary depending on each situation. Things like appraisals and credit problems can push the process into taking longer than normal. However, it normally takes 30 to 45 days. In order to make the process go a little faster, be sure to return documents and disclosures quickly. If the lender has a request for information, offer that information quickly.
How Soon Can You Refinance a Mortgage Loan?
There aren’t any hard restrictions on when you can refinance your mortgage loan. Some banks require borrowers to maintain their mortgage for at least a year, but each lender’s terms are different. How soon you choose to refinance will have more to do with your overall goal when refinancing and if the perks outweigh the costs. If you want to use the same lender, talk to them about your options for refinancing with them. However, you can always seek out another lender if you don’t like what you hear. If you do use another lender you may have duplicate fees you just paid if you just got your home loan which may sway you to wait to refinance.
How soon you refinance a mortgage will have a lot to do with why you’re refinancing to begin with. For instance, homeowners need to have equity built in to their home in order to take advantage of many refinancing perks, such as getting out of PMI. If you’re planning on moving out of your home, it may not be financially responsible to refinance. If you’re close to paying off your mortgage, it may not be smart to refinance, either. How soon you choose to refinance after taking out your original home loan may not have a hard restriction, but be sure your savings outweigh the costs before doing it too soon.
First-time home buying is difficult in itself. Refinancing can seem like an aspect of homeownership that can seem too overwhelming and not worth the headache for the investment even for experienced home buyers. However, it’s helpful to understand why someone might consider refinancing at if it’s right for you. In truth, refinancing your mortgage loan can save you a lot of money. It can also be a huge investment that pays off in the long-term if you do it at a time that makes sense for you.
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Chelsy is a writer from Montana who now lives in Boise, Idaho. She graduated with her journalism degree from the University of Montana in 2012. She enjoys talk radio, cold coffee, and playing Frisbee with her dog, Titan. Follow Chelsy on Twitter @Chelsy5
This post was updated November 13, 2018. It was originally published October 16, 2018.