What is mortgage refinancing?
Mortgage refinancing is replacing your current home loan with a new loan. Just like any other loan, you apply for refinancing, which includes submitting your credit report, employment history and home appraisal. The new loan is based on your income, credit and the equity in your home. You would then use the borrowed money from your new loan to pay off your old mortgage debt.
Most people refinance to lock in a lower interest rate or shorten the terms of their mortgage. You can also get a cash-out refinance, which would allow you to borrow against the equity in your home while -- ideally -- getting a lower rate. This cash is typically used to consolidate higher-interest debt or improve your home.
Costs associated with refinancing your mortgage
While refinancing can save you money, it can be costly. This is why looking at the numbers before you make a decision, is important.
Just like your original mortgage, refinancing includes much of the same fees, such as appraisal costs, application and origination fees, underwriting costs, title search fees and more. Shopping around for a lender who not only offers the lowest interest rate but also the lowest fees is worth your time and effort. Because refinancing costs can cost thousands, make sure the money you put in makes sense financially and will save you money in the long run.
Reasons why homeowners refinance
Locking in a lower interest rate might be the most popular reason people refinance their mortgage. Homeowners who have improved their credit might be able to switch to a lower interest rate by refinancing.
Similarly, folks with ARMs might want to switch to a fixed-rate mortgage, especially in a rising-rate environment.
Those who want to borrow against the equity in their home can take out a cash-out refinance, which is a new loan that’s more than what you owe on the house. You would pay off your original mortgage, replacing it with the new one, and get the remainder in cash.
Divorce is another reason to refinance, in order to get one spouse’s name off the loan.
For FHA borrowers, refinancing into a conventional mortgage is a way to kick the monthly mortgage insurance premium, MIP, to the curb. The MIP costs from 0.45 percent to 1.25 percent of the total loan balance throughout the life of the loan.
Homeowners who owe more than their house is worth might also want to refinance using specially designed programs for their needs. Both Fannie Mae and Freddie Mac offer high loan-to-value (LTV) refinance options.
Refinancing next steps
If you looked at the numbers and refinancing makes sense, then it’s time to shop around for a lender. Make sure you get everything in writing, such as fees and interest rates. Lenders will send you a loan estimate which breaks down what they charge. Loan estimates are great tools for comparison shopping tol give you the clearest picture of which lender will save you the most money.
When shopping for a mortgage, how do you know what type of lender is right for you? Today, mortgage lenders and brokers provide various ways to buy a home, each with its own strengths.
Here are answers to some frequently asked questions on how refinancing works, answered by Bankrate expert Dr. Don Taylor.
View and compare current mortgage rates and refinance rates (updated today). Find ARM and fixed loan rate mortgages for 30 year, 15 year, 10 year, and more, along with Bankrate’s weekly analysis.