Refinancing your mortgage can help you save a lot on interest payments. Refinancing an existing loan is still a mortgage. It allows you to fully or partially repay an already issued loan at the expense of a new one on more favorable terms. The borrower can reduce mortgage current rates and reduce or increase the mortgage repayment period thanks to refinancing. It is crucial to understand how to refi to pay your mortgage on favorable terms. With this guide to refinancing mortgage, it will be easier for you to get all-important points.
What is Mortgage Refinance
Refinancing is one of the ways to improve the conditions of an existing loan. Numerous people want to know how to refinance your home. Improvements can be different:
- refinance rates and overpayments,
- increase in term and decrease in payment,
- consolidation of several loans into one.
All methods are aimed at improving the financial situation. The scheme is as follows: you draw up a new loan. The bank you issued transfers the money to close your existing mortgage to the bank where you gave the refinanced loan. Housing will be pledged to the "new" lender. To understand the basics of refinancing better, watch Jeb Smith's video. The main points are clearly explained here: https://youtu.be/vAq_Gz1aCHY.
Features of the Mortgage Refinancing Procedure
Banks approve refinancing applications only for customers with a good credit history. Age, registration, official place of work, and salary are also checked. For some borrowers, refinancing under the state program is possible. Young families eligible for the program can refinance their mortgage on preferential terms. Nevertheless, it only applies to family mortgages. The initial loan must be issued to purchase a real estate in the primary market. Registration is carried out in several stages:
- you choose a suitable organization and program with more favorable conditions;
- apply for refinancing;
- if the bank approves, you bring the documents;
- then you sign an agreement with the bank, pay off the old debt and close the old mortgage agreement.
The financial institution will issue a new payment schedule for mortgage refinance. You can officially carry out the procedure as many times as you like. Still, banks will not make a deal several times in a row. After 1-2 refinancing procedures, the probability of approval of the application is significantly reduced. Also, the bank may refuse if you have delays in payments, there are other loans, or errors in the documents.
After signing the contract, you need to issue an encumbrance on the mortgaged apartment as soon as possible. Until then, the bank will use the base refinance rates without benefits, which is unprofitable for the borrower.
Is it Profitable to Refinance a Mortgage?
Over the past 5 years, mortgage lending conditions have become more benign. Those who have already taken a mortgage are thinking about refinancing. But before you apply, you need to calculate the overpayment and weigh all the pros and cons since this procedure does not always bring benefits.
Registration resembles the standard procedure for obtaining a mortgage loan. Even though the borrower has already passed the test when getting the first mortgage, he needs to re-submit all the documents. You can apply for refinancing no earlier than six months after signing the contract. An apartment or house purchased with bank money is also checked. According to Investopedia, home refinancing typically costs between 3% and 6% of the total loan, but borrowers can find ways to cut costs.
Pros and Cons of Refinancing Your Mortgage
Refinancing is beneficial in the following cases:
- mortgage current rates have a difference of at least 1%;
- paid less than 50% of the debt;
- too long a loan term - if you have a stable income, it can be reduced.
Also, keep in mind that the mortgage refinancing procedure is not quick. The bank will carefully check your solvency, income, place of work, and apartment state. Additional costs are possible: bank commission, property insurance, etc. You can calculate the profitability of refinancing using refinance calculators.
There are no downsides to refinancing. However, there are situations in which it simply should not be done:
- More than half of the loan term has passed (interest has already been paid, so there is no point in taking a new loan to pay interest again).
- The difference between the potential and the current rate is less than 1.5% (considering all the costs, the savings on overpayment will not be very large, and besides, it will take a lot of time and effort).
The disadvantages of refinancing include the process of registration itself: once again, calculations, collection of documents, and considerable financial costs. But with the correct analysis with the help of refinance calculators, the result will please you because you will save a substantial amount by lowering the rate.
How is Refinancing a Loan Different from Restructuring?
Borrowers often confuse these two terms. Refinancing occurs at the initiative of the client of the bank if he has found more favorable lending conditions. Refinancing does not affect credit history.
The bank resorts to restructuring at the borrower's request when, for one reason or another, he cannot make regular payments on the loan. Restructuring hurts credit history, and in the future, if the borrower decides to take a loan, he will have to prove his solvency to the bank.
Where to Apply for Refinancing?
Contact the bank where you have a mortgage. It may be able to offer a lower interest rate. This will eliminate the need to recollect a significant part of the documents. Suppose, for some reason, your bank is not ready to refinance the mortgage. In that case, you can consider the offers of other organizations.