What Does Refinancing a House Mean and Should You Do It?

If your current mortgage has high payments...or alternatively if you can pay off the loan faster, you might want to refinance. In fact, there are any number of reasons why refinancing might be a good idea for you.

What is Refinancing?

Refinancing is replacing your current home loan with a new one. The new loan will have different terms, which should be more favorable to you and your goals. For example, you might refinance because your current loan has a high fixed interest rate and interest rates have come down.

Or you might refinance to get a cash influx from your home's equity to, say, build an extension, or to pay off other debt which is at a higher rate. If you are stuck paying insurance on an FHA loan, refinancing can be your only way out.

In fact, now is a particularly good time to refinance because interest rates are particularly low.

How does Refinancing Work?

Refinancing is pretty simple. With your initial mortgage, the bank pays the seller and then you pay the bank. When you refinance, the new loan pays off the old loan.

It still requires a similar qualifying process, although if the amount is smaller it may be easier to get the new loan. You will still file an application and go through the same process as with a new mortgage. You can refinance with your existing lender (which is what most people do) or with a new one. Be aware that refinancing will cost you money; there are closing costs and fees that can amount to thousands of dollars. Make sure that it is worth it, for whatever your goals are.

Generally, you should consider refinancing if:

• Interest rates are lower than when you took out the loan and/or you have an adjustable rate mortgage.
• You have a decent amount of equity.
• You need cash to fund your other plans.

If you are refinancing to get money, always compare the costs with those of a personal loan. Often, but not always, refinancing is favorable, but it does reduce your equity.

Steps of Refinancing

Your first step is to establish your refinancing goal, whether it is lower monthly payments, a shorter loan term, getting rid of insurance, or getting an influx of cash.

Once you have done this, you will:

1. Crunch the numbers to establish whether refinancing is worth it. Avoid the temptation to refinance to a new 30 year term to get your payments down; instead, get the lender to match (or even reduce, if your circumstances have improved) the loan term. Generally, refinancing is worth it if you can reduce your rate by half a percentage point or more.
2. Shop around for the best rates for the mortgage you want. Get a loan estimate from a number of potential lenders, and then compare them.
3. Choose the lender that offers you the best terms. This might vary according to your specific refinancing goals.
4. Lock your interest rate. Especially if your goal is a lower interest rate, make sure to lock your rate.
5. Close on the loan.

Types of Refinancing

When making your decision, bear in mind that there are four types of refinancing.

1. Rate-and-term refinancing. This is the most common type and is refinancing to change your interest rates, your loan term, or both. This does not typically change the amount you owe, although some people do roll some closing costs into the loan.
2. Cash-out. This is for turning equity into cash. You would do this if you need money to fund a goal. (You can also change the rate and term).
3. Debt-consolidation. Similar to the cash-out, but in this case you are using the cash to pay your other debt. As the mortgage interest rate is typically lower, this can save you money.
4. Streamline. Streamlined refinancing is only available for FHA, VA, and Fannie Mae and Freddie Mac loans. It eliminates the credit check and appraisal stages and allows you to refinance faster. You would typically do this to get rid of mortgage insurance payments.

If you are considering refinancing your home, contact Lend Smart Mortgage today. We offer all types of refinancing with competitive rates and can advise you on the best course of action for you.