Mortgage Resource Center

Empowerment through Education
Nov 22, 2019
What the Heck is Refinancing??

Are you happy with your current Mortgage? Or do you need cash now? If you have specific fiscal goals you'd like to meet, you may want to consider Refinancing your Mortgage.

 

So you're probably wondering… "What the heck is Refinancing?" Does this mean I'm taking out a second loan?? No, it doesn't! We'll clarify the term…

 

Refinancing occurs when you get a new mortgage to replace the original Mortgage. Refinancing is done to help a mortgage borrower; Whether it's obtaining a better mortgage interest rate, APR and/or term, pulling cash out of your equity or consolidating debt. The first loan gets paid-off, allowing a new Mortgage loan to be created. It's simply making a new mortgage and throwing out the original Mortgage.

 

Most people tend to Refinance once they've had Equity built-up in their home. Much like "putting money down" for the original Mortgage, you can use your Equity towards Refinancing. Many borrowers tend to think that you need to have at least 20% Equity in your home in order to do this (Much like the myth of needing 20% cash to put down to obtain the original Mortgage.). However, you can Refinance with less; you just may need to pay a monthly PMI (Private Mortgage Insurance) if you’re above the 80% loan to a value mark. But, the good news is that the money you save by Refinancing can be substantially more than the PMI payments- benefiting you in the end. (Plus, PMI is usually on a temporary basis.)

 

So why would a homeowner refinance?

 

Good question! There are many good reasons a homeowner may want to refinance their mortgage. Here is a shortlist of some of the most popular reasons to ReFi:

 

- Perhaps your credit has improved, or there's an uptick in the market, and you'd like to get a better mortgage interest rate and/or APR.

- You'd like to change the term of the mortgage loan (To either shorten or extend the life of the loan. An example of this would be to go from a 30-year mortgage to a 15-year mortgage; shortening the term of the loan.).

- You'd like to consolidate your debt by rolling all of your monthly loan payments into your mortgage; allowing you to make one payment a month at the same interest rate so you're only paying back one loan. (Thereby helping your credit, your wallet and simplifying the payment process.)

- You need cash and would like to liquify some (if not all) of your equity in exchange for the funds. This cash can be useful if you need home improvements, to pay off loans (auto, student, credit cards, etc.), and/or pay off other debts (that fancy wedding you had a few years back, medical or vet bills, etc.).

- Get rid of the monthly Private Mortgage Insurance (PMI) payment. PMI is required if your LTV (Loan-to-Value Ratio) is above 80% (meaning your down payment was less than 20%). PMI cancels automatically when you pay off enough of your loan that your LTV reaches 78%, or if you’ve reached the midpoint of your loan term. However, if you currently have an FHA loan, it's likely you're currently paying PMI. The good news is if you have 20% equity built-up in your home, you may be able to refinance into a conventional mortgage and eliminate the PMI.

- Your great rate is about to expire on your adjustable-rate mortgage (ARM) and you'd like to get a better rate on a fixed-rate mortgage.

 

When should a homeowner NOT refinance?

Sure, there are plenty of wonderful reasons to refinance, but there are also times or goals that you may have that would undermine refinancing. Here are some examples:

 

- You want to refinance with a cash-out option to spend money on frivolous expenses.

- You JUST purchased your home. (This is also known as "Lender Churning" and although it's beneficial to lenders it can costs borrowers more when considering the costs of refinancing.)

- If you don't plan to stay in your home for much longer, the benefits of a lower interest rate may not actually benefit you when you take into account the costs associated with a new mortgage.

 

Still, think refinancing can help you? See if you qualify in a matter of seconds by clicking here

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