When you refinance, you replace your current home loan with a new one. 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 initially purchased the home.
Reasons to Refinance a Mortgage
When your goal is to pay less every month, you can either refinance into a loan with a lower interest rate or a longer loan term. However, extending the term means that you pay more interest in the long run.
Pay Off the Loan Faster
You can switch to a mortgage with a shorter term and, as a result, pay less interest over the life of the loan. One downside to this is that your monthly payments will probably go up.
Get Rid of Mortgage Insurance
Private mortgage insurance (PMI) on conventional home loans can be canceled, you can only get rid of FHA mortgage insurance premiums by selling your home or refinancing when you have accumulated enough equity (equity can be calculated by estimating the value of your home, then subtracting your mortgage balance from that number).
If you have significant equity in your home, you may be able to cash out a portion of it with a refinance to pay bills, finance a large purchase, or buy out an ex-spouse in a divorce.
Switching from an Adjustable Rate to a Fixed Rate Loan
Interest rates on adjustable rate mortgages (ARMs) can increase over time, while the ones on fixed rate loans stay the same. If you’re looking for more of a sense of financial stability and would prefer making steady payments on your loan, then you might want to consider refinancing.
If you have multiple loans, it might make sense to consolidate them into a single loan; it’s easier to keep track of payments that way.
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