The mortgage rates are still low, which gives homeowners who have not yet taken advantage of lower borrowing costs an extended chance to refinance. Although the process of refinancing a mortgage is not much different than when you got your first mortgage, understanding the details and the options available can help you make an informed decision and secure the best rate.
A mortgage refinance is a process that replaces your existing mortgage with a loan at a lower rate. Refinancing is a way to lower your monthly payments, save interest over the loan’s life, pay off your mortgage sooner, and draw on your equity if you require cash for whatever reason.
What is the process of refinancing your mortgage?
Refinances will result in a new interest rate and terms. It could also be from a different lender to the one you were working with before.
You might be able to reset the repayment time with this loan. Let’s say you have made five years’ worth of mortgage payments. This means that you still have 25 years to repay the loan. Refinance to a 30-year loan will allow you to start again and repay the loan in 30 years. Instead, refinance to a 20-year loan. You’ll be able to pay off your loan five years sooner.
Refinance comes with a closing cost. This can impact whether you can get a new mortgage. These fees can range from 2 to 5 percent of the amount that you refinance. Common closing costs are appraisal fees, origination fees, and discount points.
Reasons to refinance your mortgage
There are many reasons to refinance. The biggest is the possibility of lowering your interest rates. Refinancing can be a good option if you can lower your interest rate by half to three-quarters of a percentage point or more. However, you must plan to remain in the house long enough to recover the closing costs.
Refinances can be used to reduce your loan term and pay off your loan faster. Refinance a 30-year mortgage to a 15-year loan.
Refinancing to fixed-rate loans can also be an option if you have an adjustable-rate mortgage. With the assurance that principal and interest payments will remain the same throughout the loan term, you can rest assured.
Refinancing is also possible if you have less than 20% equity in your home and you have been paying private mortgage coverage.
The pros and cons of refinancing your mortgage
- Reduce your interest rate
- Reduce your mortgage payments
- Reduce the term of your loan to pay it off earlier
- Cash-out at closing by tapping into the equity in your home
- Consolidate debt
- You can switch from an adjustable-rate mortgage to a fixed-rate mortgage or vice versa
- Cancel your mortgage insurance premiums
- Closing costs are high
- Possibility to extend your loan term for an additional cost
- You will have less equity in your home when you take out cash
- If rates fall significantly after you close, borrower’s remorse
- The Financing Process can take up to 45 days.
Types and methods of mortgage refinancing
There are several options for mortgage refinancing.
Refinances at a traditional rate and term change the interest rate, the term, or both. This can lower your monthly payment and help you save interest. Unless you add closing costs to the new loan, your owe amount will not change.
Cash-out refinances allow you to take equity from your home and convert it into cash that you can spend. This will increase your mortgage debt, but you’ll have money to invest or fund a goal like home improvements. A cash-out refinance Sydney can provide you with a new interest rate and term.
Debt consolidation refinances are similar to cash-out refinances. However, you can use the equity you have built to repay non-mortgage credit card debt. Although your mortgage debt will rise, mortgage rates are generally lower than other loan interest rates.
Streamline Refinances speed up the process by removing some of the requirements for traditional refinances, such as an appraisal or credit check. This option is available to FHA, VA, Fannie Mae, and Freddie Mac loans.