Explain Refinancing a Mortgage
Posted by Jennifer Quilter
Much simpler than most financial experts sometimes make it sound, refinancing a mortgage is to pay off your original home loan with a new one. Of course, as you know from your experience obtaining your original home loan there are a number of things to consider with this process.
The first is your reason for doing this. Are you looking for a lower, or a fixed interest rate? Or are you looking to stretch out the length of your loan for lower monthly payments, or possibly shorten it? Another common reason for refinancing a mortgage is to borrow more money to fund a project or pay off high interest debts in exchange for a lower rate with tax deductible payments.
Once you have your reason and know what you are looking for everything comes down to numbers.
Let me explain, hopefully you are planning on gaining some money, long term, from refinancing. However, to make sure you are going to have these benefits, you want to calculate your upfront costs.
The first costs to consider are closing out your original mortgage. Most loans have closing costs associated with them. You’ll want to look over the terms of the loan for that. You also want to check for prepayment penalties, as these can really add up and make refinancing undesirable.
When you apply for the new loan you have all the fees that you had to pay for your original home loan, including title fees and insurance, home appraisals, etc.
If after carefully calculating all of these upfront costs out you come out ahead, then this will be beneficial for you. As a general rule, you should move forward if you find an interest rate that is 2% lower than you are currently paying. It’s important to keep in mind, however, that refinancing a mortgage is only usually worth it if you plan to stay in your home three years as that’s usually the point most realize profits from refinancing.
I know that the process can be confusing and it’s important to remember throughout the process that you can always ask your lenders questions as you go through to explain refinancing a mortgage.