Home refinancing is the process of replacing a current home mortgage loan with a completely new mortgage loan, either with the same financial company or a different one. There are many reasons to refinance, including saving money and paying off a mortgage faster, just to name a few. Mortgage lenders, such as banks and credit unions, often loan money for home refinancing, and the entire process is usually completed at the chosen financial institution. Certain criteria may need to be met before a home refinance loan can be completed; this insures that the borrower is able to pay the new mortgage payment, and protects both the lender and the borrower. Some mortgage lenders charge fees to refinance a home, and the fees may vary depending on the institution and the amount of the mortgage loan.
Reasons to Refinance
A mortgage loan usually includes two important factors: the mortgage term, or length of time before the loan is paid in full, and the interest rate; oftentimes, home refinancing is done to change one or both of these factors. Mortgage terms are usually set in number of years, the most common being 15 years and 30 years. Many people refinance in order to lengthen or shorten the term of their mortgage, perhaps to make the monthly payments lower or to pay the mortgage off faster.
When homeowners obtain their first mortgage, they may choose to have an interest rate that stays the same over the life of the loan, known as a fixed mortgage. Sometimes interest rates may fall below their fixed rate, in which case refinancing may lower their interest rate, saving them money each month and over the life of the loan.
For instance, if a homeowner had a 30-year mortgage at 8% interest and a loan of $100,000 US Dollars (USD), it would be wise to seek a refinance if the interest rates fell to 6%. The savings in such a situation would be $134 USD per month. Over the life of the loan, the savings could reach a total of $48,240 USD. If the loan was for $200,000 USD, the monthly savings would be $268 USD, an almost $100,000 USD savings over the life of the loan.
An Adjustable Rate Mortgage (ARM) has an interest rate that changes periodically, according to changes in the credit markets. One benefit of an ARM is that the interest rate may decrease at times. On the other hand, the interest rate may increase, which entices some borrowers to refinance for a mortgage with a fixed interest rate.
Besides changing the interest rate or mortgage term, many people use home refinancing to pay off other loans that have high interest rates. The mortgaged home must usually be worth more than is owed on it in order to refinance for this purpose. It is also possible to obtain cash through refinancing for home remodeling projects, but again, the home must usually be valued at a higher dollar amount than the total amount borrowed.
How to Refinance
To refinance a home, the homeowner must apply for a new mortgage with a mortgage lender. During the application process, the subject home will undergo a new appraisal to determine its value, and the homeowner's credit file will be reviewed. The lender will also order a title report on the property to search for any other liens that may appear. In most circumstances, if all items meet with the lender's approval, the loan will be approved.
Once approved, the homeowner usually meets with a mortgage broker, typically at the office of the lender or title company, to sign the new mortgage. The proceeds of the new loan are typically used to pay off the old mortgage, as well as any additional mortgages or liens on the property. Accordingly, the only mortgage showing on the home after the refinance is the new loan itself.
The home refinancing process often includes processing fees, and amounts vary between lenders. When determining if it is worthwhile to refinance a home, the homeowner should consider the long-term savings of refinancing, the costs involved in the refinance, and the length of time the homeowner intends to stay in the home. Costs typically involved in a refinance include: money used to buy down the interest rate, document preparation fees, tax service fees, title expenses, appraisal fees, and other lender's costs.