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Refinancing A Mortgage: How It Works

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Olivia James
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Did you know that the homeowners who refinanced sooner in 2021 are saving much more than $2,800 annually on a mortgage payment? 

 

Many more homeowners are in line to save, but the rate remains low. If you are planning to refinance, it would be better to gain an in-depth understanding of refinancing, how it works, and the various options available for you. 

 

This blog focuses on the meaning of refinancing, its various types, and how it works. So, without any further ado, let’s get started!

 

What Do You Mean by Refinancing? 

Refinancing your house mortgage implies trading the current mortgage for a new one. This often consists of a new principal and a new interest rate. The lender uses the new mortgage to pay the old one. This leaves you with one loan and one monthly payment. 

 

A refinance can be beneficial for removing another person from the mortgage or using your home’s equity, or for other reasons. 

 

How Does Refinancing Work?

While buying a home, you receive a mortgage against which you must pay. The money you pay goes into the account of the home seller. Refinancing a home enables you with a new mortgage. Instead of depending on your former seller, the new mortgage pays off the old home loan you had. 

 

Mortgage refinancing, however, requires you to qualify for the loan. This part is similar to meeting the lender’s requirements for the former mortgage. The process is simple.

You need to apply, complete the entire process of refinancing, and approach closing, similar to the process of buying the home at first. 

 

Common Types of Refinancing

Refinancing options are often categorized into a few common ways. 

 

  • Rate-and-Term: A rate-and-term refinancing is free of changing the principal loan balance. It only requires changing the interest rate, the repayment term, or sometimes, both. 
  • Cash Out: In this type of refinancing, the new loan is higher than your existing balance, and you will get the difference in cash. Some people utilize this method to pay their debts or for home renovation purposes. 
  • Cash In: Here, you can put more money and secure a lower interest rate and shorter loan term. This way, you will eliminate a mortgage insurance requirement for a new loan. 

 

Regardless of the refinancing, you select, they all are simple refinancing processes. But do spend some time to compare mortgage lenders before you submit the applications.

 

When Does Refinancing Your Home Loan Makes Sense?

Mortgage refinancing can reduce your monthly payments by lowering the interest rate or extending the loan term. Refinancing can also lessen the long-run interest costs via a lower mortgage rate, shorter loan term, or both. 

 

It can even help you do away with mortgage insurance. Closing costs like the title insurance fee, credit report fee, appraisal fee, and origination fee are crucial factors influencing your refinancing decision. They usually amount to 2% to 6% of the borrowed amount. 

 

You should be mindful of the loan’s closing costs to generate the break-even point. This way, your savings would surpass the closing costs. Then, divide the closing costs by the monthly savings resulting from your new payment to calculate the break-even point. 

 

Summing Up

Refinancing can be an excellent financial decision if it lessens your mortgage payment and reduces the loan term. It is also beneficial if it helps you build your equity. If you know how to deal with this helpful tool, you can reap good benefits out of it and even bring your debt under control. 

 

But before you make any decision, bear in mind to cater to the various requirements ensuring your financial safety and benefits.  


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