Mortgage refinancing definition
Let's give a mortgage refinance explained.
Refinancing involves getting a new mortgage to replace an existing one.
When you refinance, you apply for a new mortgage, just like you did when you bought your home. But this time, instead of utilizing the loan money to buy a house, it's being used to pay off your existing mortgage balance.
Refinancing replaces the debt on your current mortgage. It also allows you to choose the rate and term of your new mortgage, so you can get a new mortgage that will save you money or help you achieve other economic goals.
Key benefits of mortgage refinancing
Your financial situation will change over the years. You will build your capital; your income may increase; you may be able to pay off your credit card debt and improve your credit reports. When we know what is a mortgage refinance, we can note the main pros of refinancing:
Saving money by borrowing at a lower rate. Mortgage interest rates are regularly changing. If rates have dropped since you took out a mortgage, there's a good chance you can refinance at a lower rate and save, even if your financial situation hasn't changed since you bought the house.
Changing the characteristics of a mortgage loan during refinancing. You can choose the number of years of your loan («loan term»); you can select the type of interest rate (fixed or adjustable), and you can even determine how much you will pay when you close your mortgage.
Get your home early, waive mortgage insurance, and get cash. Many householders refinance to get a lower mortgage rate. However, refinancing your mortgage can help you pay off your home faster, drop your mortgage insurance, or use your equity to pay off debt or finance home repairs.
Some borrowers may take advantage of a mortgage interest rate deduction. Mortgage interest is often tax-free, so if you can combine another debt into your mortgage, you can deduct the interest paid. But before making a decision, it is better to consult a tax specialist.
Now we know what is refinancing advantages. Even with rising rates, there are good reasons to refinance.
A most common type of mortgage refinancing
It's essential to know how many types of refinances are there. There are three types of mortgage refinancing. Choosing the right option depends on your financial situation.
Rate-and-term refinance
What is a refinance in such a case? A rate-and-term refinance allows householders to change the mortgage rate on an existing loan, the term of the loan, or both.
The purpose of refinancing a rate-and-term loan is to save money. You can save monthly through a lower monthly payment or pay less interest overall due to a lower mortgage rate or shorter loan term.
Cash-out refinance
The fundamental purpose of cash-in refinancing is to use equity.
Home equity is the part of the house that you own. For example, if your house is worth $400,000 and you owe $250,000 in a mortgage, you have $150,000 worth of net worth.
But capital is not liquid money. To access it, you must take out a loan against the value of your home. That's where cash refinancing comes in.
How does refinancing a mortgage work? Remember that when you refinance by interest rate and term, your new loan balance is equal to what you currently owe on the house, and it is used to pay off your existing mortgage.
Cash-in refinance
Cash refinancing is the opposite of cash refinancing.
Thanks to cash-in refinance, the homeowner brings money to close to pay off the loan balance and reduce the amount owed to the bank. It can result in a lower mortgage rate, a shorter loan term, or both.
If we understand what is mortgage refinancing, we can comprehend why homeowners often prefer the cash-in mortgage refinance process.
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To get lower interest rates only available at lower loan-to-value (LTV) ratios. LTV measures the size of a loan compared to the value of a home. For instance, a loan with an LTV of 70% will often charge higher interest rates than a loan with an LTV of 65%.
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Cancel mortgage insurance premiums. When you pay off your regular loan to 80% LTV or below, your Private Mortgage Insurance (PMI) premiums are no longer payable.
This rule does not apply to FHA loans, which typically require Mortgage Insurance Premiums (MIPs) for the loan's entire life.
We hope such refinancing mortgage explained is straightforward.
The difference between refinancing and buying a home
Despite the similarities between buying and refinancing, borrowers can usually expect to provide less documentation during the refinancing process.
You will still be asked to present proof of income using a W-2 form, tax returns, and pay stubs; confirmation of assets through bank statements; and evidence of US citizenship or residence status. But you will not be asked to provide information about the actual home handover.
Also, since there's no need to rush to close a refinancing – unlike buying a house – you can spend more time looking for the lowest interest rate. Since the primary purpose of refinancing is to save you money, you should take your time comparing lenders to find the best refinancing rate and fees available to you.
Usually, people are interested in what is refinancing a home and how long it takes. We answer no more than 30 days.
