What Happens When You Refinance a Mortgage?
When you buy a house, you get a mortgage to pay it off. The money goes to the seller of the house. When you refinance, you get a new mortgage. Instead of going to the seller of the house, the new mortgage pays the remaining amount from the previous mortgage. To refinance the mortgage, you must be eligible for the loan, just as you had to meet the lender’s requirements for the original mortgage. You submit an application, go through the subscription process and complete the process, just like when you bought the house.
Why and when should you refinance?
Before you begin, ask yourself why you want to refinance your home loan. Your goal will guide the mortgage refinancing process from the start.
Reduce the monthly payment. If you want to pay less each month, you can refinance a loan at a lower interest rate. Another way to reduce the monthly payment is to extend the term of the loan, for example from 15 to 30 years. The downside to extending the term is that more long-term interest is paid.
Use equity. If you are refinancing to borrow more than you need for your current loan, the lender will give you a check for the difference. This is called refinancing cash withdrawals. People often get cash refinancing and a lower interest rate at the same time.
Pay off the loan faster. If you refinance a 30-year mortgage to a 15-year loan, you will pay off the loan in half the time. Therefore, you pay less interest over the life of the loan. A 15-year mortgage has advantages and disadvantages. One drawback is that monthly payments generally increase.
Get rid of FHA mortgage insurance. Private mortgage insurance for conventional home loans can be canceled, but in many cases, the Federal Housing Administration’s mortgage insurance premium (MIP), which pays FHA loans, cannot be canceled. The only way to get rid of FHA mortgage insurance premiums is to sell the house or refinance the loan when you have raised enough capital. Calculate the value of your home, then subtract the remaining amount from your mortgage to calculate the value of your home.
You can also switch from a variable rate loan to a fixed-rate loan. Interest rates on variable rate mortgages can increase over time. Fixed-rate loans remain the same. Refinancing an ARM loan into a fixed-rate loan provides financial stability if you prefer constant payments.
Should I refinance another 30-year loan?
The goal is usually to reduce your monthly payment. And it’s tempting to refinance yourself with another 30-year term to lower your mortgage payment. But it does mean that you will end up spending even more time paying for your house and paying more long-term interest.
Instead, you can ask the lender to adjust the remaining term of your loan. For example, if you had a 30-year loan for three years, you are still 27 years old. You can ask the lender to fix payments for the repayment of the refinanced loan for 27 years instead of 30 years. This way, you reduce the interest you pay during the term of the loan. This is mortgage amortization at work.
Buy the best refinancing rates
Now is the time to do some preliminary work, or rather work on the web and phone calls. You want to buy your best refinancing rate and get an estimated budget from each lender. Any potential lender must issue the quote within three days of receiving your basic information.
The loan calculation is a simple three-page document that lists the loan terms, expected payments, estimated closing costs, and other fees.