Maybe you have been paying your current mortgage consistently for a while, and you're considering doing some renovations around the house. Perhaps you also need a little bit of financial ease, especially in these times. One of the many options out there is refinancing a mortgage. What does it mean to refinance a mortgage? We find out.
In order to do this swap or refinance though, a good analysis of your current financial situation is important. A good time to consider refinancing is when you qualify for an interest rate that is low enough for you that you can practically save some money over the life of the new loan. This is even after you have completed the costs of refinancing as well. Additionally it would be great to see how much equity or value that you have amassed, almost like a personal line of credit as well. This can even help save some cash too.
Each institution will have their own terms and criteria in providing the refinance of your mortgage. One of the key things is that your financial background will be critically analyzed and also your current financial circumstances. Things such as your credit history, score, credit reports, your debt to income ratio, investments and even employment status will be under the microscope. These factors will also influence your rate of repayment interest.
The value of your home will need to be done as the lender will want a comprehensive appraisal of your property. This valuation will also help to determine how much money you may be able to access. Therefore the better the condition and well maintained property will naturally have higher appraisal than that in a poorer condition.
How much do you plan to borrow? This can also influence your interest rate of repayment as well.
Let’s See How It Works
With refinancing, generally what occurs is that you get a new mortgage loan. This new loan pays off the outstanding balance on your original loan and subsequently closes out the original loan. You as a client are now bound and guided by the terms of the new mortgage loan, interest and repayment conditions.
For ease of reference, let's say you have now refinanced your old loan to a 25 year loan. It does not matter how long you were paying your original loan, you have now started on a new path and will now be paying for 25 years in this new payment cycle.
Know The Why
It makes no sense getting refinanced if you don't necessarily need the capital. Of course sometimes you proactively may want one for an anticipated requirements. Many individuals do the refinancing to reduce the monthly payment amount of the original loan, while others may simply want to change the type and the conditions of the existing mortgage loan. Others still may do it to reduce the length of time of payments overall.
Other considerations to go the refinancing route may be:
- To Reduce the total amount being paid in interest
- Use and drawing cash out of the home equity to fund other projects
- Changing the rate of interest as well for example from an adjustable rate to fixed
- Canceling of mortgage insurance premiums
What Types of Refinancing are There?
This type of refinancing enables you to enhance your mortgage interest rate, with a new loan, but of the same type. Thereby reducing the stress of the qualification processes. This option tends not to have a cash-out option. In other words you have gotten the same loan mortgage redone with everything the same except with a lowered rate of interest. This helps save a few dollars.
The Cash - Out Refinancing
Quite a few may go for this option, as this enables you to withdraw cash from the entire equity within your home, by increasing the overall loan amount in the new loan. It is with this option though that monthly payments will typically increase. So a bigger mortgage with the home as collateral / equity.
The Cash - In Refinancing
With a cash-in refinance, you would generally pay a lump sum which would go towards home equity. This overall would act to reduce the loan amount balance. Think of this as a down-payment or deposit to lower the amount that they are borrowing under the new loan terms, and this would work if the balance on the existing mortgage is higher that the market value of your property. Additionally this helps in reducing monthly payments as well as reducing the interest rate.
The Rate & Term Refinance
As long as you can meet the general qualifications for the lender, you can get some form of refinancing. In this instance a rate and term refinancing allows you to acquire a totally new loan with different interest rates and even different terms. All of this for the same total amount of loan. In other words borrow the same money but on new conditions - whether moving to lowering monthly payments or even changing your rates from adjustable to fixed.
Once you have contacted several lenders or have asked your broker to do such, you can ascertain what types of refinancing that they are prepared to offer to you. Additionally as you shop around, you can also hand-pick what works in your favor, as you can compare the best type of refinancing for your needs.
Now you can make an informed decision.