How to Refinance Your Mortgage
There are plenty of reasons why a homeowner would want to refinance their home. But, getting a better interest rate on their loan is usually main driving force.
If you have a 25-year fixed-rate mortgage, then you’re effectively locked into the interest rate you started with. But refinancing allows you to essentially get a new deal with better interest rates.
As a homeowner, you may wonder how to refinance your mortgage. We’ll try to give you a head start to figuring it out.
What Exactly is a Refinance?
Refinancing means that you are essentially breaking the contract of your old mortgage and negotiating a new one (usually with another lender or mortgage broker). But, you may ask yourself, “Should I refinance my mortgage?” This is especially true when you consider that the penalties of breaking a mortgage contract can be costly.
There are usually three reasons why people opt to refinance their homes:
- Getting a better interest rate
- Gaining access to home equity
- Consolidating debt
As mentioned earlier, the primary reason most people refinance is for a better interest rate. With a refinance, you can obtain up to 80% of the equity of your home in cash through various methods. You can use this for a variety of projects like adding value to your home or paying for your child’s education. Equity also allows you to consolidate and even pay off any outstanding debts.
What Exactly is a Refinance?
The refinancing process can be long and arduous. You have to be patient and dutiful if you want to ensure a successful refinance. There are a few steps you should go through to start the process on the right foot:
- Check your credit score and make sure it’s good enough
- Check your home’s value
- Look around for good refinance rates or enlist the services of a mortgage broker to do that for you
- Calculate whether it makes financial sense for you to go through with the process
- Scrounge up all the requisite paperwork (there will be a lot)
- Find a rate that works for you
The key step here is calculating whether it makes financial sense. Refinancing your mortgage isn’t always the best plan if you end up having to pay extra in the long run. In order to actually achieve the refinancing goal, you can do one of three things:
- Break the previous mortgage contract completely
- Add a home equity line of credit
- Use a blended option that combines both the original mortgage and any other borrowed money
Take the Costs into Account
Again, breaking a mortgage contract will usually incur a penalty. If you don’t have the cash on hand to deal with that penalty, then it may be best to wait it out. Some lenders, however, offer “no-cost switch” programs. This means that the new lender will take on some or all of the costs associated with breaking a mortgage contract. Some of these costs may include:
- Early mortgage termination and penalty fees
- Legal fees for renewal
- Appraisal fees
- Processing and underwriting fees
- Title and escrow fees
- Loan origination points
I have numerous lenders who have such programs in their profile. If you want to refinance but don’t like the prospect of paying any fees, then a no-cost program might be right for you.
So, if you ask yourself, “Why should I refinance my mortgage?” the answer is clear. You should refinance your mortgage because it gives you the best shot of possibly reducing both the term and the interest rate on your original mortgage. In most cases, you can take the costs into account and find out that refinancing really does give you the best option.
What you should do now
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