mortgage refinancing

A Short Guide to Mortgage Refinancing

One of the most expensive purchases and biggest investment decisions a person will ever make is a home. According to the National Association of Realtors, 33% of people who buy a home are first-time home buyers, aged 33 and up. A mortgage can help you purchase your dream home, and refinancing your mortgage might help you achieve even more important financial objectives.

It’s a good idea to take a step back and make sure you understand everything about mortgage refinancing before starting. That’s why we put together a short guide about this topic to help you see the bigger picture. At the end of this blog, you will get a better perspective on how you should proceed with your plan to achieve your desired result.

What Is Mortgage Refinancing?

Mortgage refinancing is provided by banks, creditors, or other financial institutions, allowing homeowners to pay off their current mortgage, and apply for a new loan with newer and updated terms and interest rates. When you refinance, the new loan pays off any remaining debt you have from the old loan, and the funds are transferred to the new loan.

Homeowners could decide to refinance their mortgage for a number of reasons, including the need to hire a legal advisor or to gain access to home equity. Others use refinancing to pay off a mortgage more quickly, avoid paying mortgage insurance, or change from an adjustable-rate to a fixed-rate loan.

Let’s first think about a few important elements of refinancing a mortgage, and then walk through the procedure step by step.

How Mortgage Refinancing Works

You start by applying for a mortgage to purchase a property. The creditor pays the seller for the property, which you then receive, and you pay your creditor according to the terms of the mortgage. Then you apply for a new loan with new payment terms to settle the outstanding debt you have from the previous loan.

You must be eligible for a loan when refinancing a mortgage. You must submit an application, go through the underwriting procedure, and attend the closing to meet the requirements of the lender before you can purchase a home.

You should heavily take your credit score into account when deciding whether or not to move forward with a refinance. It is possible to refinance even with a less-than-perfect credit rating, but doing so will cost you significantly more due to rising interest rates, resulting in larger monthly mortgage payments. It’s important to work on ramping up your credit score before applying for a refinance.

Why You Should Consider Refinancing Your Mortgage

You can find yourself in a predicament where you have an imminent responsibility to meet, like educational expenses or an urgent medical need. You can access the equity in your property by refinancing your mortgage and withdrawing the money. It can also help you settle your existing, high-interest loans.

In response to the COVID-19 pandemic, the Federal Reserve set the federal funds rate from 0 to 0.25% in order to safeguard the economy and maintain the cash flow. Mortgage rates are not under the supervision of the Federal Reserve, but it has a vast effect and changes in monetary policy that influences the rates.

Some market circumstances can make refinancing more appealing. This is particularly true when interest rates drop.

Benefits of Mortgage Refinancing

Benefits of Mortgage Refinancing

A mortgage can have a shorter term or lower monthly payments. If you can cut your interest rate by at least half a percentage point, it’s worthwhile to think about refinancing.

Refinancing your loan has the following advantages.

1. It can reduce your monthly payments

If your current loan interest rate is greater than the market’s standard rates, refinancing could help you save money. If you currently have a mortgage with a 15-year term, you can convert it to a new one with a 30-year term to lower your monthly payments.

2. It pays off the loan faster

Conversely, if you have a 30-year mortgage, you can also switch to a 15-year loan term to grow equity faster. Reducing the length of your mortgage can help you get the most out of your house, especially if you’re thinking about selling it.

3. It gets rid of mortgage insurance

If you put less than 20% down payment on a property, you’ll likely have to pay private mortgage insurance (PMI) on top of the principal and the interest. Once you have built 20% equity, refinancing can eliminate the PMI payment, allowing you to save more money.

You are also obligated to pay the Federal Housing Administration (FHA) mortgage insurance premium if your loan is FHA-insured. The only option to get rid of this financial responsibility is to sell your house, or refinance once you’ve built enough equity in your house.

4. It can be converted from adjustable rate to fixed rate

Adjustable-rate mortgage interest rates may rise over time, while loans with fixed rates don’t change, and will have the same interest rate for the entirety of the loan term. When you prefer consistent payments, switching from adjustable to fixed rates may offer you financial stability.

5. It lets you get cash from home equity

The lender issues you a check for the difference when you borrow more money than what you owed on your existing loan; this is also known as cash-out refinance. If you need to pay for your kid’s tuition or complete home upgrades, a cash-out refinance can help put more money in your pocket.

How to Refinance Your Mortgage

It’s essential to do the math to see whether or not refinancing makes sense for you. You could cut the interest rate or your monthly payments, or even work it in your favor to increase your home’s value. You need to understand the step-by-step process of refinancing so you can fully take advantage of its benefits.

1. Set a goal

Do you need to reduce your monthly payment? Would borrowing money help you pay off a debt or fund a significant project? It would be a wise move to set a specific goal for your new mortgage before starting the refinancing process.

2. Check your credit score

People with negative credit may not be eligible for the best low-interest rates. You should know your credit score before speaking with lenders. It will help you gain an insight into how lenders assess your risk and make any corrections.

3. Compare interest rates with several mortgage lenders

Without harming your credit, you can ask for quotations from several lenders to find out which one has lower interest rates. Because market rates change quickly, you should also consider a specific time frame. You should also ask someone, preferably a professional, to help you explore your alternatives, especially if you are eligible to refinance a VA or FHA mortgage.

4. Pick a mortgage company that suits your rate preference

The mortgage rate fluctuates and could increase at any time. When you have locked in your rate with a lender, and you are confident with the payment terms, you need to take action as soon as possible, and get your paperwork in order.

5. Get ready for the closing

Your lender will begin the closing procedure as soon as you have given the necessary documents, application forms, proof of income, etc. You may also need to have your home assessed, which is an additional expense, depending on the terms of your refinance.

6. Close the transaction

You complete the process by signing the closing documents and taking full benefits of your refinance. Your lender will instruct you on where to go and what to bring to complete the transaction. The money might also be wired ahead of time to the bank.

We’re Here to Legally Assist You in Mortgage Refinancing

Refinancing your mortgage may help you achieve your objectives, whether you’re looking for a new loan payment term or want to access your house equity. When you’ve made the decision to refinance, look for lenders with the best rates and terms. This will help you put on the path to obtaining a new mortgage that suits your needs.

If you need legal advice about mortgage refinancing, the Smith Law Group can get you covered. Don’t hesitate to contact us at your convenience.