What is a mortgage refinance?

A mortgage refinance replaces your current home loan with a new one. Often people refinance to reduce the interest rate, cut monthly payments or tap into their home’s equity. Others get a mortgage refinance to pay off the loan faster, get rid of FHA mortgage insurance or switch from an adjustable-rate to a fixed-rate loan.

Let’s consider some important initial steps of mortgage refinancing — and then run through the process step by step.

What happens when you refinance a mortgage?

When you buy a home, you get a mortgage to pay for it. The money goes to the home seller. When you refinance, you get a new mortgage. Instead of going to the home’s seller, the new mortgage pays off the balance of the old home loan. Mortgage refinancing requires you to qualify for the loan, just as you had to meet the lender’s requirements for the original mortgage. You file an application, go through the underwriting process and go to closing, as you did when you bought the home.

Why and when should you refinance?

Before you begin, consider why you want to refinance your home loan. Your goal will guide the mortgage refinance process from the beginning.

Reduce the monthly payment. When your goal is to pay less every month, you can refinance into a loan with a lower interest rate. Another way to reduce the monthly payment is to extend the loan term — say, from 15 years to 30. The drawback to extending the term is that you pay more interest in the long run.

Tap into equity. When you refinance to borrow more than you owe on your current loan, the lender gives you a check for the difference. This is called a cash-out refinance. People often get a cash-out refinance and a lower interest rate at the same time.

Pay off the loan faster. When you refinance from a 30-year mortgage into a 15-year loan, you pay off the loan in half the time. As a result, you pay less interest over the life of the loan. There are pros and cons to a 15-year mortgage. One downside is that the monthly payments usually go up.

Get rid of FHA mortgage insurance. Private mortgage insurance on conventional home loans can be canceled, but the Federal Housing Administration mortgage insurance premium (MIP) you pay on FHA loans cannot in many cases. The only way to get rid of FHA mortgage insurance premiums is to sell the home or refinance the loan when you have accumulated enough equity. Estimate your home value, then subtract your mortgage balance to calculate your home equity.

Switch from an adjustable to a fixed-rate loan. Interest rates on adjustable-rate mortgages can go up over time. Fixed-rate loans stay the same. Refinancing from an ARM to a fixed-rate loan provides financial stability when you prefer steady payments.

Should I refinance into another 30-year loan?

Reducing your monthly payment is usually the goal. And it’s tempting to refinance with another full 30-year term to lower your mortgage payment. But that means you’ll end up taking even longer to pay off your house and paying more interest over the long run.

Use a mortgage refinance calculator

Once you’ve decided to refinance, it’s time to work the numbers. Using a mortgage refinance calculator can help you shop for the best mortgage.

You’ll need to know (or make some educated guesses about) your new interest rate and your new loan amount.

It also will show your refinance “break-even” point. Getting a mortgage generally requires paying fees, often amounting to thousands of dollars. It takes a while for a refinance to break even — that is, for the accumulated monthly savings to exceed the refinance closing costs.

Working with a refinance calculator will give you a good idea of what to expect. Even better, when you have a few estimates from mortgage lenders you can enter the terms they offer you into the calculator to help determine which one offers the best deal.

Refinancing a mortgage, step by step

Set your goal. Reduce monthly payments? Shorten the loan term? Get rid of FHA mortgage insurance?
hop for the best mortgage refinance rate. Keep an eye on fees, too. Apply for a mortgage with three to five lenders. Submit all applications within a two-week period to minimize the impact on your credit score.
Call Us Today To Get the Most Competitive Rate On Your Home Mortgage Refinance. To pick the best offer, compare the Loan Estimate document each lender provides after you apply. The Loan Estimate will tell you how much cash you’ll need for closing costs.
Lock your interest rate. When you lock the interest rate, it can’t be changed during a specified period. You and the lender will try to close the loan before the rate lock expires.
Close on the loan. This is when you’ll pay those closing costs that were listed in the Loan Estimate and again in the Closing Disclosure. Closing on a refinance is like closing on a purchase loan, with one main difference: No one hands you the keys to the home at the end.

Need To Refinance Your Home Loan Today? Get the most competitive mortgage refinance rates by giving us a call, and speaking to one of our mortgage loan refinance experts: (718)752-7338

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