Refinancing your mortgage could allow you to save money or tap into equity. What refinancing does is replaces your home loan with a new one. This gives you possibilities for a lower interest rate, lower monthly payments, or the option to access your home’s equity.
Here is a guide on how, why, and when to refinance your mortgage:
How?
Just like when you filed for your first home mortgage, you will submit an application for your new home loan and go through the underwriting and closing process. Your new mortgage will pay off the balance of the old home loan.
To start the process, you will need to take 6 steps:
- Set your goal
- Shop for the best rate
- Pre-qualify with three to five lenders
- Choose a lender
- Lock in your rate
- Pick your loan
Why?
Refinancing your mortgage could result in a reduced monthly payment and lower interest rate. Who wouldn’t want to save money every month? If you are unable to reduce the monthly payment, you could extend the loan term – but then you would be paying more interest in the long run.
Many homeowners refinance their mortgage in order to tap into their home’s equity. When you borrow more than you owe on your home, the lender will give you a check for the difference. This is called a cash-out refinance. You must have equity built up in your house to use a cash-out refinance. Equity is often accessed to be used for home improvements or other financial needs.
If you find that you have more money coming in that you can spare, you can refinance your loan to pay if off faster. For example, taking your 30-year loan to a 15-year loan. You will also pay less interest over the life of the loan.
Homeowners will also refinance their mortgage to get rid of FHA mortgage insurance. The Federal Housing Administration mortgage insurance premium (MIP) you pay on FHA loans cannot be cancelled. The only way to get rid of FHA insurance premiums is to sell the home or refinance the loan when you have accumulated enough equity.
Read more about FHA loans and the other specifics involved.
When?
The simple answer is when your home has equity built up or you could afford to refinance your mortgage. Another good reason to consider refinancing is if your credit score has significantly improved.
In order to determine if you can refinance your mortgage, use a refinancing calculator.
