How Does Refinancing Work?
Refinancing can get you a lower interest rate, adjust the length of your loan, get you a fixed rate, or free up some money for paying off high interest debt. But before we look at what it can do for you, let’s look at exactly how does refinancing work?
Refinancing is the act of paying off your original loan with a brand new loan from a new lender. If you have a home loan, because you are ending your current loan, you do have to pay all closing costs and any prepayment penalties which can actually be very costly, so you’ll want to look through the terms of your loan to see if this applies to you. Other than the closing costs, you will also have to pay all the fees for opening your new loan just as you did the first time. These include loan application fees, appraisal fees, for your property, title search and title insurance, loan origination fees, mortgage insurance, and other applicable fees involved in getting a new home loan.
If there are so many other costs, why bother refinancing?
Depending on your particular goals there are many good long term reasons to do this that we can see when we look at more about how does refinancing work.
A great reason for refinancing a loan is for lower interest rates. As a general rule it’s only worth the effort if you will be getting a 2% lower interest rate and will be staying with the loan three years as this is the point most people experience the benefits. It’s always important even with these rules to go over the numbers carefully to make sure refinancing is worth it.
Another popular reason is to switch from an adjustable rate mortgage to a fixed rated if the changing monthly payments are making you uncomfortable. You can also stretch out your loan payments and make each monthly payment smaller. This will make it so you pay more in interest total, but if you need to lower your monthly budget this is an option.
People with high interest debts can obtain a loan for more than they currently owe on their home to pay off their debts in favor of lower interest rates and tax deductible payments on a home loan. The bad side to this being that if you miss a payment you will lose your home, and you are extending the life of your mortgage.
As we have seen, there are many reasons for refinancing, but they essentially work the same way.
How does refinancing work? You close out your loan with a new one, first carefully calculating out the benefits to make sure the work will be worth it long term.
By Jennifer Quilter