Whenever mortgage interest rates go up or down, it’s inevitable that the term “refinance” comes up in conversation. But what does it mean to refinance a mortgage, and is a mortgage refinance right for you? Often, refinancing your mortgage can result in a less expensive loan, but that’s not always the case.
In terms of a mortgage, refinancing means replacing your current loan with a different one. Your new mortgage can be with the same or a different lender – the point for a mortgage refinance is to change one or several of the terms of your loan.
There are a few reasons why a homeowner might want to refinance, including:
More often that not, however, a homeowner refinances their home loan in order to take advantage of lower mortgage rates.
Generally, interest rates available for both first-time home loans and refinancing are about the same. The reason a homeowner would be interested in any one of today’s current refinance rates is because he or she obtained a home loan in the past, when interest rates in general were higher, and would like to reduce the cost of that loan by switching to a lower interest rate available today.
However, it’s not always cost-effective for a borrower to refinance, even if refinance mortgage rates are lower than the original rate on the current loan. That’s why it’s important for anyone considering a mortgage refinance to weight all the costs of changing their loan, and not just the interest rate alone.
Because a mortgage refinance essentially entails going through the home financing process all over again, the decision to refinance shouldn’t be taken lightly. First all of the paperwork, income verification, credit check and other tedious and time-consuming processes must be followed when changing loans.
Additionally, the closing costs you pay when you originally buy a house — licensing, taxes and other fees — must also be paid when refinancing. That means in addition to the mortgage rate, you must also examine the total fees and consider whether the savings in interest would make up for this additional cost. Sometimes the fees charged by a lender are so high that they cancel out the reduction in interest paid — other times, though, the fees are very reasonable and refinancing is a smart decision.
Remember, refinancing a mortgage is a big undertaking, but has the potential to save you thousands of dollars on your mortgage with current refinance rates. Just be sure to thoroughly examine the terms of a refinancing offer before committing to ensure you really are saving money.
Refinancing, an extension or increase to existing debt, is the financial term for the action of paying off an existing loan by taking out a new loan and using the same property as security.
There are several reasons to consider refinancing. Homeowners may choose to refinance to reduce their mortgage expense if interest rates have dropped (or they have found a better deal), to move from an adjustable to a fixed rate loan if rates are rising, or to take a cash-out refinancing (which involves much higher interest rates) to consolidate existing debt or to invest the cash in improvements that will increase your home’s value.
When closing, there are fees attached: closing costs are generally comparable to those for any mortgage. If you're considering refinancing to reduce your payments, you should first calculate how long it will take before you make up for the closing costs and begin to save money again.