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All About Mortgage Refinancing

Knowing when to refinance your mortgage may help you save thousands of dollars over the life of your loan. If you’re considering refinancing your home, here’s what you need to know.

What Mortgage Refinancing Means

Mortgage refinancing is the process of obtaining a new loan. It’s essentially the process of applying for a loan over again, regardless of how old (or new) your current loan is. People usually refinance because they want to try to lower their interest rates, change mortgage companies or take a lump sum of cash out.

When you refinance, you trade your original loan (and its rates and terms) for another loan—preferably one that’s better suited to your financial needs.

Should I Refinance My Home?

People typically decide to refinance their homes once they have enough home equity. Home equity is how much of your home you actually own. In a stable market, your home will usually increase in value over time, which leads to more home equity. However, in an unstable market, home prices may actually go down, which may lead to less equity.

Regardless of how much equity you have, a home refinance may still help you reduce your interest rate. If you’ve been able to increase your credit score since you initially agreed on loan terms, you may be eligible for lower interest rates and all-around better loan terms. In this case, refinancing may be a great way for you to help save money in the long run.

When you refinance, you have the option of choosing between 15- and 30-year terms. Changing a 30-year mortgage to a newly available 15-year one could help you save thousands over your loan’s interest, since you’ll be paying more per month but less in interest overall. When you refinance, you can also reconsider whether you want a fixed or variable interest rate.

Another reason to refinance is if you want to take out a large sum of money for other purchases. Common instances include purchasing a new car, paying off loans or even paying off debt. This option works by taking out a home equity line of credit, which is calculated in three steps:

  1. The lender will start by having your home appraised.
  2. Looking at your appraisal, the lender will then determine how much of it they’re willing to loan to you.
  3. After deciding how much to lend, the lender will then subtract your original mortgage from this to see how much is available for an additional loan.

This refinancing option typically works best if you’ve increased the value of your home since you bought it or if property in your area has increased.

Risks Involved

While mortgage refinancing may help reduce your interest, there are risks you should be aware of. Before you ask, “Should I refinance?” have a look below.

  • Make sure your payments are already in order before refinancing your mortgage. While you may have the opportunity to take out a loan, using one form of debt to pay off another is never a good idea.
  • Be aware of any fees, including a closing fee or a home equity fee, which may be associated with your new loans.
  • Prepayment penalties are also common with some loan terms. Check your original mortgage’s contract terms to make sure there’s nothing about paying to refinance your loan.
  • If you know you’re going to be relocating in the next few years, or if you’re planning on switching homes, it may not in your best interest to refinance, as closing costs can often outweigh your potential savings.
  • Sometimes, but not often, people refinance their homes and end up with higher interest rates and therefore end up paying more. If you decide to refinance, make sure your new proposed rates are better than your current ones.

For more home buying advice, also see:

Home Buying Tips and Advice

The Ultimate Guide for the First-Time Home Buyer

Mortgage Tips and Advice

How Much House Can You Afford?

Mortgage Rates Based On Credit Score




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