A mortgage should be looked at as an investment. After all, you’re investing in the home you want to live in for decades to come. Over time, homeowners may be interested in ways they can pay their mortgage off sooner, or – in the event of changes in health or employment – lower their monthly payments. In these scenarios, refinancing may be a viable option. Continue reading to learn more about what it means to refinance and what you can expect from the process.
What Does It Mean to Refinance Your Mortgage?
Refinancing your mortgage is the process of exchanging your current mortgage for a new one. After you’ve decided to refinance, your current mortgage lender will pay off the remainder of your existing mortgage with the funds from the new one.
Reasons to Refinance
As mentioned above, there are several reasons homeowners may want to refinance their mortgage. Here is a brief overview of each of these reasons and why it may be beneficial:
You Need to Pay Off Debts
One of the biggest reasons why homeowners refinance their home is that it can help them pay off their debts much faster than they would if they were only paying the minimum balance on everything.
2. Cash Out Your Equity
If you decide to go with a cash-out refinance, you end up borrowing more than you own and then pocket the difference. This type of refinance comes out of the value of your home rising. Since your equity goes up, you’re able to cash out the difference and use the money for debt consolidation or pay for a home improvement. Doing this also allows you to borrow money and a much lower interest rate than other loan types. The downside to this kind of refinance is that there will be implications come tax time.
3. Changing Your Loan Term
Let’s say you started out with a 30-year loan term. Years later, you’re making more money and you decide that you can handle a 15-year year payment instead. While this will increase your payment, it will also decrease your interest rate. Or let’s say you need to do the opposite; you can refinance your mortgage to extend your loan term to try and get your monthly payments down. Either way, you can refinance your home to adjust your loan terms to what you feel you can handle.
4. Changing Your Loan Type
Maybe when you first got your mortgage, it made more sense for you to get an adjustable-rate mortgage because you wanted to save on interest, but now that you see that interest rates for fixed-rate loans are low at the moment. You can refinance your home to lock in that low-interest rate on a fixed-rate loan while you have the chance. Or maybe you have enough equity in your home to consider switching your loan from an FHA loan to a conventional loan so you don’t have to deal with paying for private mortgage insurance.
5. Lower Your Interest Rate
Mortgage rates fluctuate all the time. Maybe your interest rate isn’t exactly what you’re looking for and you see the market is closer to where you want to be. Refinancing your mortgage can save you money not only upfront with the lowering of your payment, but also over time since your interest rate will be lower and you’ll be paying less money throughout the loan’s lifetime.
How Does Refinancing Work?
Refinancing is a process that takes on average about 30 to 45 days and includes the following steps:
- Apply: You decide what kind of refinancing you want to apply for and then go through an application process similar to what you did when you applied for your mortgage initially. You will need some legal documents such as W-2s, pay stubs, and bank statements. For this, you don’t have to go through the same lender if you think another lender is offering something better. The new refinanced mortgage you apply for pays off your old mortgage, meaning if you go through a new lender, you won’t have to deal with your old lender again.
- Lock in your interest rate: Once you’re approved, you have the option to put a lock on your interest rate that lasts anywhere from 15 to 60 days. If your closing period goes beyond that, you may have the option to pay extra to extend the locking period. You could float the interest, which means that whatever the interest rate is at closing is what you end up with, which could be lower or higher than what you would have started within the application process.
- Underwriting: WIth this, your lender appraises your financial information to ensure everything is correct and that you qualify for what you apply for.
- Home appraisal: Your lender may call for someone to come out and appraise your property to determine its value before deciding what kind of refinancing you qualify for and for how much.
- Closing: Once everything is completed, you will go for closing, where you go over all of the final numbers and sign all of the documents to make the new loan official.
How to Decide If You Should Refinance
Like deciding to buy a home, the decision to refinance your mortgage requires a lot of thought and research. You should look at market trends and keep an eye on your own financial situation to see if refinancing is a viable option. Also, you can use a mortgage refinance calculator to figure out if it’s an option worth pursuing. You might even want to consider similar options, such as loan modification and getting a second mortgage, to see if they are better options for you.
If You’re Looking to Refinance Your Home, Call City Creek Mortgage
Contact us today at (801) 501-7950 to see what your options are for refinancing your mortgage. We treat you like one of the family and will do whatever it takes to get you the best rate we possibly can for your new mortgage. City Creek Mortgage is Utah’s most trusted, respected, and loved mortgage company.