What is Refinance Mortgage, Explained Easy

Banks Editorial Team · May 31, 2018

Many homeowners have some idea about what is refinance mortgage and what it can do for them. If your reason is to save money or just to put a little extra flexibility in your budget, the key to refinance is making your mortgage work better for you. Would you like to lower your monthly mortgage payments or eliminate Private Mortgage Insurance (PMI)? Are you hoping to consolidate debt or pay off the loan faster? Do you have a home improvement project and you’d like to use the equity in your home? Or maybe just saving money? If you answered yes to any of those questions, a refinance mortgage could be the answer.

The Benefits of Refinancing

So, what is refinance mortgage? When you refinance a mortgage, you are simply replacing one loan with another. The new loan pays off the old debt. The debt still remains but the new loan will have different terms and features that will benefit your finances. There are several reasons a homeowner might consider a refinance mortgage option.

1. Save Money

The first is to save money. Yes, save money. Long-term loans or loans with a high-interest rate can be replaced with a new loan with a lower interest rate which lowers your payment and the interest paid over the life of the loan. Lower payments lead to lower monthly requirements. Cash flow is improved and more money is available in your budget too with what you like.

2. Shorten your Loan

A refinance mortgage also can shorten the length of the life of the loan. In some loans, a shorter repayment time frame can be chosen. For example, if you currently have a 30-year loan, with 24 years left to repay, a refinance to a 15-year mortgage might make more sense. This type of refinancing is great if you would like to make larger payments but pay off the debt more quickly. Yes, you can make extra payments without refinancing, so we suggest you weigh the new terms carefully in order to ensure the closing costs and fees are helpful to your bottom line. And you compare carefully the mortgage rates available for you.

3. Consolidating your Debt

If you multiple loans or credit card debt, another refinance option is a consolidation loan. This is especially beneficial if can lock in a lower interest and combine all of your payments into one. If you are interested in making home improvements, you can consider an equity loan, which is a refinance with a cash out option.

4. Change your Loan’s Terms

Often, homeowners with variable or Adjustable Rate Mortgages (ARMs) will refinance their loan in order to get a fixed rate. This will protect you from raising rates. The same is true for loans that might require a lump sum or ‘balloon’ payment. A refinance can be used to fund the balloon payment, thus giving you more time to repay.

Refinance Process Overview

Once you have decided the type of refinance option that works best for your existing mortgage, the rest of the process is quite similar to the original mortgage process. Homeowners should have a clear understanding of their current financial standing. Review your credit history and remedy any inaccuracies at least 60 days before you consider refinancing. A favorable credit score will make you more attractive to mainstream lenders such as those from Wells Fargo, Lending Tree, Bank of America or Quicken.

Now that we understand what is refinance mortgage, you can make the decision to refinance. The next step would the application process. Be prepared to provide similar documentation as you did during the original mortgage process, but do not be surprised if additional information is required. After the application is approved, there may or may not be an additional appraisal of your home. The closing date will be set. After the closing, you have the standard three-day right of cancel.

No matter the economic climate, it can be difficult for homeowners to make the payments on a home mortgage. Between possible high interest rates and an unstable economy, making mortgage payments may become tougher than you ever expected. Should you find yourself in this situation, it might be time to consider a refinance mortgage. And the first step to do this is to answer the key question: what is refinance mortgage?

 

 

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