When you refinance a loan, you replace it with a new one. But when you refinance a mortgage, the goal is typically to save money by getting a lower interest rate and/or reducing monthly payments. The significant benefits of refinancing your mortgage include reducing your interest rate and monthly payment. While major drawbacks include the potential for increasing debt if you refinance into a larger loan amount and losing the equity in your home if you refinance into a longer-term.
Whether or not refinancing is right for you depends on many factors. These include how long you’ve owned your home, how much equity is in your home, what kind of interest rates are available, and what loan terms are available. If you’re not sure about how to go about this, mortgage experts at MLD Mortgage will be able to guide you through the details.
To refinance, the borrower must meet all requirements outlined by the lender, including being current on their existing loan(s) at the time of closing. Closing costs may apply, including origination charges, appraisal fees, documentation fees, settlement costs, etc.
We’ve outlined a detailed guide on things to know before you refinance your mortgage.
What Is a Mortgage Refinance?
A mortgage refinance is a way to replace your current mortgage loan with a new one. Unlike refinancing a car loan, you’re replacing your existing home loan with another one. The original mortgage goes away, and the new one pays off its balance when you do that.
The reason to do this is pretty simple: it allows you to change your existing mortgage. Maybe you want to lower your monthly payment by getting a lower interest rate or switching from an adjustable-rate loan (ARM) to a fixed-rate loan. Or perhaps you want more flexibility in how much of your income you can use for payments each month (a process called amortization) or how long it takes to pay off your home.
Do Your Research
Figure out what kind of refinancing is right for you. There are several different types of refinancing that you can use to get a lower rate or change your loan from an adjustable-rate to a fixed-rate mortgage. You can also choose between cash-out and rate/term refinance options:
- Cash-out refinance: You’ll receive your cash when you close on the new mortgage, which will replace the old one on your home. You’ll pay closing costs at that time as well. If you use the funds for anything other than home improvements, remember that interest on loans up to $750,000 may not be tax-deductible under recent tax laws (it was previously up to $1 million).
- Rate/term refinance: With this type of refinancing, you only repay the portion of the original loan that exceeds the value of your home when it comes time to sell—this means no cash is involved, and there are no closing costs unless you have an FHA or VA loan and wish to drop mortgage insurance coverage.
Learn about all fees and terms involved in refinancing, so there aren’t any surprises down the road. The annual percentage rate (APR) shows how much interest you pay per year in addition to any fees included in financing—and since different lenders may offer varying rates for similar loans based on their internal policies, make sure you compare offers before deciding which lender is right for you.
Refinance to the Lowest Rate and Fees You Can Find
One of the first things to look for when shopping for a refi is a low-interest rate. However, the APR is an even better measure of the value of a refinance because it includes both the interest rate and any fees that are charged as part of the loan. It’s essential to compare APRs across lenders not just to choose the lowest one but also to make sure that you understand what factors contribute to your APR.
For example, if one lender is offering you an APR with much lower upfront costs than another lender, this may signify that that lender has higher long-term costs built into their loan terms. When comparing lenders, be sure to take note of their rates and fees—it can help you negotiate better closing costs with your current lender later on.
High Credit Scores Are a Plus
People with high credit scores are eligible for lower interest rates. The reason is that they typically pay their bills on time, while those with low credit scores may do the opposite. When you refinance your mortgage, your new lender will want to see your score and know that you can handle the loan payment. If you have a good track record of paying off debts over time, it will be easy for them to contact you and take care of any questions or concerns before approving the loan.
A high credit score can help you qualify for more favorable terms on your loans, such as lower interest rates and payments which ultimately save money every month. Improving your credit score doesn’t happen overnight. But there are steps you can take now and over time to improve this number.
Consider Mortgage Insurance
Mortgage insurance—also known as mortgage payment protection insurance (MPPI)— protects you if you lose your job or cannot work due to an illness or accident. Should either of these happen, the insurer will cover your mortgage payments.
It’s essential to have this coverage because losing your job or being out of work for an extended period can make it difficult to pay your bills, especially when faced with an additional expense like having to refinance. If you’re forced into bankruptcy, not only will you damage your credit rating but also put yourself at risk of losing your home if the court rules that it be sold off to repay any debts.
The most common reason homeowners consider refinancing is typically a desire for lower monthly payments. Refinancing can be one way of getting there by lowering the interest rate on their current loans. However, if homeowners think their credit score has improved enough since getting their first mortgage, it might be worth applying for new financing altogether. It will help you get the best possible rate and/or terms available at that time.