If the term ‘refinance’ sounds like it belongs to another language, you’ve come to the right place. Taking into account the current economic downturn, Americans rushing to refinance their mortgages are at the highest rates since August of 2020. If you’re feeling that your mortgage rates are crippling you financially, then there’s no harm to shopping around for better rates. This brings us to the mortgage refinance process, its nuances, protocols, and how to do it right.
Keep on reading for our thorough breakdown of what mortgage refinance entails, from the definition and how the whole process works to the standard fees you might have to pay.
What Does It Mean to Refinance Your Home?
Let’s start with the foundational understanding of what ‘refinancing’ means.
In the simplest of terms, when you want to get a new mortgage to replace your original rates, it’s known in the financial world as “refinancing.”
The refinancing process allows the borrower to get a better deal —better interest terms and rates— than their current mortgage.
By utilizing a mortgage refinance, the borrower can convert a variable loan rate to a fixed rate, as well as obtaining a lower interest rate on their mortgage overall.
However, it’s essential to keep in mind that by opening the doors for refinancing, borrowers need to keep their eyes peeled for better rates. After all, you don’t want to change your current mortgage rate and terms to one that leaves you worse off than before.
The Mortgage Refinance Process: Why and When You Should Refinance Your Home?
Now that you have the basic building blocks of what mortgage refinance can bring to the table, it’s time to explore when and why you should undertake the process.
Before you begin, you’ll have to nail down why you’re unsatisfied with your current mortgage rate and terms. Is it the monthly payment? Or do you need to refinance so you can more equity than what’s currently available to you?
There are key reasons and benefits to refinancing, if any of them resonate with you, then it can be a great option for your finances.
Decreasing the Monthly Payment
If you’re starting to feel that your monthly mortgage payments are causing you finance damage, then refinancing your mortgage can be a segway into paying less on a monthly basis.
In addition, you can also reduce your monthly payment by extending your loan terms. For example, if your current loan term is 15 years, you can extend it to 30 years, which will result in a sharp reduction of your monthly payments.
Yet, it’s crucial to keep in mind that by extending your loan term, you’ll be paying more interest in the long term.
One of the unique perks of mortgage refinancing is the ability to access additional equity, without going through the traditional routes of applying for separate loans.
You can do so by refinancing to borrow more than you originally owe on your current loan. This way your lender will give you a check for the difference between the two amounts.
This type of mortgage refinance is known as a cash-out refinance. What’s great about this category of mortgage refinance is the hitting-two-birds-with-one-stone benefit of getting a boost in equity, as well as lowering your interest rate at the same time.
Paying off Your Loan Faster
You might be more interested in doing the reverse of extending your mortgage loan. If you feel like your mortgage is extending into infinity and beyond, then it might be time to refinance your 30-year mortgage loan into a 15-year one.
This is a tactic that can come quite in handy when you’re interested in paying less interest over the entire life of the loan.
On the other hand, you’ll have to deal with an increase in your monthly payments.
Removing FHA Mortgage Insurance
Sometimes, your actual monthly payments aren’t your main concern. It’s the Federal Housing Administration (FHA) mortgage insurance premiums that are causing you problems.
The tricky thing about FHA insurance premiums is your inability to cancel them, unlike traditional private mortgage insurance.
Yet, the only option for you to remove the burden of FHA mortgage insurance premiums is by either selling your home or refinancing your mortgage once you’ve accumulated enough equity.
You can assume that you’ve accumulated enough equity by estimating your home value, then subtracting your mortgage balance. The resulting number is an approximation of your home equity.
Shifting From Variable-Rate to Fixed-Rate
There’s no denying how beneficial (and superior) a fixed-rate mortgage can be in comparison to a variable or adjustable-rate loan.
As with any traditional economy, you’ll find that rates can increase or decrease depending on the economical cycles. Therefore, there’s always the risk of having your interest rates increase over time when it comes to adjustable-rate mortgages.
However, fixed-rate loans will stay the same regardless of how the market is performing.
Thus, if you’re getting sick of the instability that comes with an adjustable-rate loan, you can refinance to a fixed-rate loan for a boost of financial stability and concrete monthly payments.
What Are the Fees Attached to the Refinancing Process?
As with any financial instrument, mortgage refinancing will be coming with fees attached.
Yet, if you’ve done your math right. You’ll find that your refinanced mortgage can pay for itself in the long run.
After looking at the benefits and reasons why you should be refinancing your mortgage, you should be able to make the decision of exploring mortgage refinancing options.
If you want to go ahead and start the search, these are the types of fees you’ll need to keep in mind.
- Application Fees: These are traditional fees that go hand in hand with submitting your application. It covers the processing costs of your loan, as well as the credit checks.
- Origination Fees: This type of fee tends to be a one-time cost that you pay for the purpose of loan preparation.
- Appraisal Fees: This fee does what it sounds like it does, it covers the appraisal costs in order to professionally assess the value of your home.
- Closing Costs: These are the final fees you get to pay at the very end of the process. They’ll cover the fees for the attorney who will handle the closing of the loan on behalf of the lender.
At this point, you can calculate the total sum of these refinancing fees. This batch of fees would usually amount to 3% to 6% of the remaining principal on the mortgage.
Furthermore, you most likely won’t have to pay all of those fees in one go, especially if you qualify for “no-cost financing.” Yet, you’ll have to pay them through a higher interest rate over the course of your loan.
Ready to Explore Your Options?
There’s no need to remain tethered to a mortgage loan and terms that don’t suit your financial situation and needs.
Now that you’ve explored what the mortgage refinance process looks like, you can make an educated decision and start your search for the right terms and rates.
Yet, there is still so much more to learn about the process. For instance, if you’re curious about figuring out the actual numbers of a new mortgage, then check out our mortgage loan calculator.
Also, if you have any questions, contact us and we’d be delighted to help you out as soon as possible.