What Is Refinancing?
Refinancing allows replacing an existing mortgage with a new loan. Borrowers usually refinance their mortgages to obtain better interest rates and terms to reduce their monthly payments. Also, by refinancing borrowers can get money out of the loan to pay for home renovations or other debts, and thus take advantage of their home equity to obtain a cash-out refinance.
The process is very similar as when you requested your first mortgage. You need to find lenders that offer the best terms, gather all necessary financial documents, and submit your refinancing application
Benefits of a Home Refinance
Refinancing your mortgage offers many benefits, such as:
- Lowers your monthly payments. Homeowners usually save money by refinancing their loan. With lower monthly payments you can free extra cash in your budget to pay other debts, or use those savings for your monthly mortgage payments and pay off your loan faster.
- Removes Private Mortgage Insurance (PMI). PMI is a type of mortgage insurance you might be required to pay if you have a conventional loan. Homeowners with enough equity are not required to pay PMI, and consequently are able to reduce their monthly mortgage payment.
- Reduces your loan length. A 30-year mortgage initially makes financial sense for many homeowners. But you can refinance into a shorter loan to save a great deal of money in the long run.
- Allows switching from an adjustable rate mortgage to a fixed rate loan. With an adjustable rate mortgage, the interest rate changes over time and your payments can go up or down depending on the rate change. If you switch to a fixed rate the interest rate is set for the duration of the loan and your mortgage payments will not change.
- Consolidates your first mortgage and your Home Equity Line Of Credit (HELOC). Refinancing your mortgage and HELOC into a new mortgage allows you to make a single monthly payment, take advantage of a fixed interest rate, and reduce your monthly payments.
- Uses your home equity to take out cash. With the increase in home values, you may take cash out of the equity you have built in your home. You can use this money to pay for home renovations, other debts, or for any large purchases.