A Complete Guide to Mortgage Refinancing

Do you have a loan that is no longer serving your interest? Maybe your credit has got better, and you want a loan with improved rates. Refinancing your loan is a great way of saving money or even lowering your payments. Sometimes however, it can turn out to be a big mistake. If you are considering refinancing your mortgage, read our detailed guide before you make up your mind.

In this article, we tell you everything you need to know about mortgage refinancing. These include the basics of it, benefits, possible disadvantages, myths and secrets about mortgage refinancing. Continue reading to learn more.

The basics: What is mortgage refinancing?

A mortgage refinance refers to replacing an older loan with a new mortgage that carries different terms. During the process of refinancing, the existing loan is offset by the opening of the new one, and the older mortgage balance is transferred to the new loan.
Some popular reasons for refinancing include

• To obtain a lower interest rate that usually translates to lower monthly payment.
• To obtain a shorter term for the existing loan so that your mortgage is paid off sooner. For instance, you may want to replace a 25-year mortgage with a 15-year loan.
• To get both lower interest rate and shorter term.
• To switch from a fixed-rate loan to an adjustable one, and vice-versa.

Costs to Refinance

Refinancing a mortgage doesn’t come for free. You have to pay fees to your previous lender to pay them off for giving you the loan.

You may also have to pay for credit checks, appraisals, and legal documents and filings among other things.

Sometimes the loan may be marketed as “no closing cost” loan. You will still pay for these fees even without noticing. This will happen through higher interest rates.

When is Mortgage Refinance a Good Idea?

The best time to refinance is when you believe you will genuinely benefit from a new loan. Here are some of the tell-tale signs that it’s time to refinance:

• When interest rates are low

• You have got a better credit rate since getting your first loan

• You want to avoid getting hit by high-risk mortgages

• You have a chance of getting an amortizing loan as opposed to an interest only loan.

When is it not?

You should shy from refinancing your home loan if you will waste your money and increase risks. There are times when having a lower monthly payment and interest rate can actually cost you more in the long run.

Disadvantages of Mortgage Refinance

• High cost

The cost of refinancing can be quite high, and it is its biggest disadvantage. You have to the lender a fee for processing and underwriting the loan. There is also potential lawyer’s charges, survey fees, and appraisal fees. These could translate into thousands of dollars, which might even offset the savings you might make from the reduced monthly payments. But if you do your homework well, you can find lenders who are willing to give you incentives which would cover these costs for you.

• Penalties

Entering a mortgage refinancing before the expiry of an existing agreement may attract penalties. If you hurry to refinance, you may be forced to pay the existing lender a prepayment penalty.

• It’s not always simple

The refinancing process may appear simple but this is not always the case. First, you have to qualify for a home refinance and this can be tough for people with unstable income and poor credit rating. You also must have maintained a great business relationship with your previous lender and remitted all your payments on the existing loan on time.

Popular Mortgage Refinance Myths

You’re too late

There is much talk about the Fed raising interest rates, which could make you wonder if your chance for refinance has come and passed.
But according to Ray Rodriguez, a New York-based regional mortgage sales manager for TD Bank, nothing could be further from the truth. He says that it is still a favorable time to refinance, and it can be a great move.

You won’t qualify

Another popular myth is that you won’t qualify for a mortgage refinance. The truth however, is that even if you are struggling to improve your credit card, you may still qualify.
The guidelines for qualification are beginning to loosen up a little and even people who previously were not able to refinance because of job losses or credit issues can now refinance.

You can’t refinance if you currently have an ARM

Did you take advantage of a special program or low rate with an ARM and then you changed your plans? Maybe you have decided you want to stay in the house, or your imminent relocation didn’t go through. You could be worried that you are going to be stuck permanently with higher payments when the mortgage is readjusted.

There is good news for you. Even if you have only benefitted from the good part of ARM, you could still refinance subject to your circumstances and credit warranting it.

Mortgage Refinance Secrets

Wait for lower interest rates

Mortgage rates are highly unpredictable. You can’t predict mortgage rates accurately to win all the time. Consider refinancing if rates are attractive. If rates go down later, refinance again. If rates fall significantly before finalizing the loan, just change the mortgage broker. If rates rise, you’ll be happy you got the lower one!

Look at the whole picture.

If you have paid your mortgage for many years, what you save every month when you refinance may not be as considerable as you may think. In fact, mortgage refinancing often costs a lot more than people care to think. Put differently, if you are 10 years into the mortgage, you will have to start afresh on repaying that debt if you refinance. Naturally, it sounds great to save money after you’ve refinanced your home loan. However, once you refinance a loan you’ve been servicing for 10 years, you will be paying it for 10 years more.

Conclusion

Mortgage Refinancing lets a homeowner pay off the current home loan by obtaining another mortgage on the same property, but on improved terms. It has its advantages and disadvantages and it’s upon a homeowner to decide after evaluating the pros and cons. Some of mortgage refinance benefits include lower interest rates and shorter repayment terms.

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