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What is mortgage refinance?

You may have heard that mortgage interest rates are at an all time low. However, if you don't know what a mortgage refinance is, you won't be able to benefit from this development. If you are curious how you can refinance your home, the good news is, the topic of mortgage refinance isn't a difficult one.

Refinancing your home simply means procuring a new mortgage which you will use to pay off your existing one. Why would you do this? If your existing mortgage charges you a 6.5% interest rate, and you get a new loan at a rate of 4.5%, you could save a bundle on your interest payments over the life of your loan. If this sounds good, let's walk through it step by step.

The process for refinancing your home is nearly identical to getting that first mortgage to purchase your home. First, you will compare the rates of several different lenders side by side to locate the best product. This is probably the most complicated step, as it can be difficult to compare loans on the same terms. How so? Well, some mortgages offer you the chance to pay points up front, to lower the cost of the repayment of the loan. These can be tricky, and for the most part should be avoided, unless you have a large sum of cash with nothing to invest it in.

Home Loan

Second, you will need to decide between adjustable rate mortgages and fixed rate ones. Most experts agree that the wisest financial move you can make in this area is to select a fixed rate mortgage. You will have the option to choose between a 30 year fixed and a 15 year fixed rate loan. The shorter the repayment period, the higher your monthly payments will be, but the less interest you will end up paying.

Third, now you will have selected several mortgages that have identical points, are fixed and of the same term. When comparing them, what else should you consider? Closing costs are the last factor you will need to examine. This is an upfront fee that all lenders charge when you refinance your home. These can be significant, ranging up to several thousand dollars. You need to ascertain if the savings of your interest rate will make up for the charge of closing costs. For example, if you save $60 in interest every month, that comes to a savings of $720 over the course of one year. If the closing costs for this refinance are $1440, it will take you two years to break even. Therefore, you can see that it is only sensible to refinance your home if you plan on staying in it for at least two years, preferably longer.

Once you've completed your comparison shopping, you are now ready to go ahead with refinancing your mortgage! You will be asked to submit the same basic information as before, such as employment and income verification. When this process is complete, you will be approved and issued your new mortgage. You have now successfully refinanced your home and saved a bundle off your payments in the long run!