Mortgage refinance refers to replacing the existing debt obligation with another one but under different terms and conditions. It is widely used with homes or places of residency. A homeowner may choose to refinance due to various reasons. For one, to consolidate other debts, to take advantage of low interest rates, free up cash as well as reduce risk and lower monthly repayment amount. In most cases, individuals facing financial distress normally opt to refinance because they want to pay all debts, reduce monthly payments or use equity to their homes.
How Refinancing Works
Normally, a homeowner with an existing loan would want to take advantage of lower interest term or rate as well as secure a better amortization schedule or possibly start with a new balance. Refinancing allows one to create a second loan with different rates through paying off the first loan instead of throwing it away. If you have good credit score, this is an opportunity to convert a variable rate mortgage to fixed rate mortgage.
Types of Refinancing
Rate and Term as well as Cash-Out refinancing are the two types of mortgage refinance. In rate and term refinancing, you simply take a loan amount say $200,000 30-year fixed mortgage at 6.5% and create a second mortgage of the same amount but half the repayment term and lower rate. This is better as you repay the mortgage faster with a lower rate. On the other hand, cash-out refinancing entails exchanging an older loan for a much bigger one with an aim of securing hard cash. For instance, if a homeowner has $200,000 30-year fixed mortgage, he or she may secure a $250,000 30-year fixed amount at 4.5% rate. This type is only better because you get extra cash as well as a lower repayment rate. Although the mortgage comes with higher outstanding balance the monthly repayments are lower.
Cost of Refinancing
Mortgage refinancing comes with fees normally referred to as closing costs. They include: application fees, title and insurance search, attorney closing cost, points and fees of mortgage origination. It also includes survey, appraisal and inspection fees among many more. The closing costs may vary from lender to lender but depending on the type and duration of the loan. Risks that come with mortgage refinancing include the penalties which may arise through the use of home equity credit. This comes in thousands of dollars which may be a huge additional costs on your mortgage.
How to Shop for a New Mortgage
There are critical factors to consider when refinancing as it may help you land a good deal or even save you thousands of dollars. Negotiate with your current lender on the fees and cost estimate while also considering shopping around and comparing with other lenders. To get the best deal on the table, be sure to do extensive online research while reading customer testimonials. Because this may be one of the most important decisions in your life, inquire more information about loan features, costs and rates from professionals like financial advisers, attorneys and friends.