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What is mortgage refinancing?
Refinancing is the process of replacing an existing mortgage with a new loan. Usually, people refinance their mortgage to reduce their monthly EMI, interest rates, or change their loan program from ARM to fixed rate mortgage rate. Also, some people need access to cash in order to finance home improvement projects or to pay various debts, and take advantage of the equity in house to get a cash-out refinance.
Whatever is your goal, the actual process of refinancing works pretty much the same way when you applied your first mortgage: you must take the time to research your loan options, collect appropriate financial documents and apply for mortgage refinancing before it can be approved.
How does it work?
Refinancing a mortgage is to take a new loan to pay off your original mortgage loan. In most cases, homeowners refinance in order to take advantage of the market interest rates, cash a portion their assets, or to reduce their monthly payment with longer repayment term.
The process of refinancing a mortgage is similar to the process of getting one in the first place. Usually it begins with shopping and comparing interest rates and other terms with the various mortgage providers to see what’s the best deal. Then this offer is compared to the terms of your existing loan.
If your credit has improved since you were approved for your first loan, you may have a good chance to qualify for the most favorable terms.
Who is eligible?
Usually the mortgage refinancing options are reserved for qualified borrowers. As a homeowner, you need to have a stable income, good credit score and at least 20% equity in your home. You have to prove your creditworthiness to initially qualify for a mortgage loan approval.
Advantages and Disadvantages.
- If you refinance at a lower rate, you could pay less interest each month and during the duration of your loan.
- If you have mortgage insurance and refinancing into a loan that does not have it, you could save money each month in the duration of your loan.
- Shortening the term of your loan can save you money by paying off your loan faster.
- If you lengthen your loan term, your monthly payment may be lower and more affordable for you.
- In cases where refinancing is from a hybrid adjustable rate or a fixed rate, you will not have to worry about having a higher future payment rate.
- If you have enough equity in your home, you may be able to get cash by refinancing. You can use the money to pay other debts, make repairs or improvements to your home, or for other needs or desires.
- You may be able to refinance without extra added costs to the loan amount or let your lender to pay the costs and provide you a slightly higher rate.
- If you refinance at a higher rate, you may pay more interest every month and during the duration of your loan.
- If you refinance for a shorter period, term rate may be lower, but your payment could be higher.
- Refinancing to a longer term may reduce your payment, but you may have to pay more interest over the entire duration of your loan.
- You’ll have to pay closing costs, which could be thousands of dollars out of pocket.
- If you plan to sell your home in the coming years, you may not recover the closing costs.
- You’ll have to spend time researching lenders, choosing a loan, collecting financial data, and the signing of closing documents.
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