If you’re like most homeowners, your mortgage is likely one of the biggest expenses each month. Wouldn’t it be great to shave a little off that amount? Mortgage refinancing could be the answer!
In this article, we’ll outline how does mortgage refinane work and what you need to know before you decide if it’s right for you. Keep reading to learn more!
What Is Refinancing?
Most homeowners choose to refinance their mortgages in order to lower their monthly payments. When you refinance, you essentially replace your current mortgage with a new one.
Mortgage refinancing is usually done to cut monthly payments, lower interest rates, or switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage.
Additionally, some people will use the equity in their property to secure a cash-out refinancing if they need access to funds for home improvement projects or to pay off other debts.
Regardless of your goal, the actual refinancing process is very similar to how it was when you applied for your first mortgage: before you can be approved, you’ll need to take the time to check your loan options, gather the required financial documents, and submit a mortgage refinancing application.
Read Full Article How Do We Review A Mortgage Refinance Company?
How Mortgage Refinancing Works?
The process you went through to get your first mortgage loan is similar to the process you go through to refinance a mortgage. Here are the steps you’ll need to take:
1. Assess Your Situation
Like any financial decision, refinancing your mortgage should only be done if it makes sense for your current situation.
You’ll need to take a close look at your finances to determine if refinancing is right for you.
Some things that you should consider include your:
- Credit history and score
- Payment history on your existing loan
- Income and employment history
- Equity in the home
- Home’s current value
- Other debt obligations
2. Shop Around
You should complete preapproval procedures with mortgage lenders so that you have a better idea of what’s available to you.
After all, it wouldn’t make sense to refinance if your options are practically the same as your current mortgage terms!
You should compare the refinance offers you are considering with the conditions of your present mortgage loan and compare them with one another.
Some things you’ll might want to consider include loan type, interest rate, term length, and monthly payment.
3. Run the Numbers
Once you have selected the best deal that is on the table for you, it’s time to compare the possible savings against the possible costs.
If you’re looking to refinance in order to reduce your monthly payments, you’ll want to find a loan with a lesser interest rate than your current mortgage.
However, you should also take into account the fees associated with the new loan, such as origination fees, closing costs, and prepayment penalties.
For example, if refinancing your loan with a new lender costs $5,000 upfront, and your new monthly payment is just $100 less than what you were previously paying, it would take you 50 months (4 years and 2 months) to break even.
In this case, you might want to consider other options to reduce your monthly payments, such as making a lump sum payment on your principal or looking into a different type of loan.
4. Submit Your Application
When ready, you’ll speak with the lender of your choice directly to submit a formal application. Information about you, your house, and your current mortgage loan must be provided. The lender will also need to verify your employment and income.
According to ICE Mortgage Technology, a company that works with lenders, the duration of this procedure, from the date of the application to the closing date, can take as long as 48 days on average.
5. Close Your Loan
Lastly, you’ll get together and sign the documents to finalize the loan when the lender is prepared to close it. The lender will complete your first debt and start a new account for your second loan.
You’ll get the money in the form of a wire transfer or a check, which you can use to pay off your first mortgage.
From there on out, you’ll make monthly payments to the new lender according to the terms of your new loan agreement.
Read: What Is Mortgage?
Also Read: Better Review
Wrapping Up
Mortgage refinancing is not as complex as it may sound at first. By following these five steps and preparing in advance, you’ll be on your way to a successful refinancing experience.
So, if you think refinancing could be the right move for you, don’t hesitate to start exploring your options today! We hope you found this article on How Does Mortgage Refinance Work useful.
Shefali Jain is a Content Editor & Writer at National Planning Cycles.
After completing her graduation in hospitality, Shefali decided to follow her passion and started writing. Shefali has been writing for two years now and contributes to our website as a skilled editor and content writer with strong research skills. Writing product and service reviews, biographies, and book reviews are some of her key areas, among many others in which she specializes.