Mortgage Refinance Overview

By Liz Clinger Updated on 7/24/2017

Our detailed overview will provide you with all the refinance information you need to take control of your financial situation and make an informed decision about your mortgage.

Refinancing a Home Mortgage

In a refinance, you take out a new home loan and use it to pay off your existing home loan. Just as with a traditional mortgage, you’ll have to qualify and pay closing costs on the loan.

If there is an early repayment penalty attached to your current mortgage, also need to pay this fee.

While refinancing will cost borrowers some money initially, it provides many long-term benefits that make the process worthwhile.

Benefits of a Mortgage Refinance

Obtain a lower interest rate on your mortgage.

Depending on when you financed your current mortgage, the mortgage interest rates available today may be lower than what you’re paying at now. There are two reasons for this.

A lower rate reduces the amount of money you’re required to pay each month on your home loan. Some homeowners can reduce their payments by 30% or even 50%, though such reductions are rare. Still, you could save anywhere from $40 to $400 each month with a lower mortgage rate.
A lower rate will allow you to pay off your mortgage faster, reducing the total amount of interest you’ll pay on your loan. It can save you tens of thousands of dollars, depending on the difference between your current rate and your new rate.

You can access your home equity and take out cash.

Homes are great wealth builders. Many homeowners have earned significant income and gained net worth simply through home ownership. This is all well and good, but you can’t take a house to the store and buy milk. Real property is illiquid, meaning you can’t readily spend it.

The cash-out refinance option designed to convert equity into spendable cash via a simple process. Three steps are involved.

Get your home appraised. The value of your home minus the outstanding balance on your current mortgage will determine how much equity you do in fact own. Home values change over time. You may have had equity a year ago, but a drop in home prices in your neighborhood may have diminished your equity. The reverse is also possible: maybe your home has increased in value since you last had it appraised. Either way, you need to find out the actual value of the property before you begin the refinance process.

Find a lender. Different lenders offer different rates and terms on their refinance loans. Contact several lenders or brokers in your area and ask them for rate quotes. The rate is arguably the most important element of the mortgage, though you’ll need to pay close attention to closing fees as well that can eat into your available equity. Some lenders prefer to charge higher fees on cash-out refi loans than on standard refi loans.

Close the loan. If you made it through the first two steps, this one shouldn’t be an issue. Turn in any paperwork your lender requests, including payment documentation for your current loan. You’ll need to prove your income and credit score, just as with any other loan.

You can use a cash-out refinance to pay for anything. But many homeowners have wasted their home equity on insignificant purchases, such as shopping sprees and fancy cars. Put the cash you get out of your home into something meaningful. Ideally, you shouldn’t complete a cash-out refinance until you know exactly what you need to spend the money on.

One of the best uses for cash from a refi is a home improvement. In this case, you’re adding to the value of your home and, in a sense, putting your equity right back into your property. Some homeowners use cash to purchase investment properties. This can provide you a source of residual income and allow you to build even more equity.

You can also use money from your cash-out refinance to consolidate expensive debts. What’s the benefit of using a mortgage to pay back other loans? It’s simple. A refinance mortgage is secured by your home. Comparatively, refinance loans have extremely low-interest rates.

You can also consolidate home equity loans and second or third mortgage with a refinance. Again, you’ll likely save money on the interest.

Rates on home equity loans, in particular, can leap up to unbearable levels very fast, if you’re not careful. It’s best to keep as much of your debt secured against your home in a fixed rate refinance mortgage.

You can eliminate an ARM loan or obtain better terms.

Adjustable rate mortgages (ARMs) are highly unstable and volatile once they’ve passed the initial introductory stage. Your monthly payments on these loans rise and fall with the market, which means you could be paying $1,100 one month and $1,500 the next and this destroys any trace of financial stability.

Most economists recommend that homeowners get out of ARM loans as fast as possible. A refinance is the best way to accomplish this. An ARM can get you a comfortable, stable, fixed-rate mortgage with a lower interest rate than your current fluctuating adjustable mortgage.

You’ll have to pay for closing costs, but in the long run, the savings will likely be more than worth it.

Refinance Qualification Requirements

It’s not difficult to refinance, but it’s not as simple as just asking your lender for a new loan, either. There are three things you need to successfully qualify for and complete a refinance.

High credit score. The higher, the better. You will also notice that the higher your credit score is, the lower your interest rate will be. If your credit needs fixing, work on this before trying to refinance.

Secure income. Income is a primary qualifying factor when applying for any financial product. Refinance loans are no different. Your current income level may have gotten you the mortgage you have now, but today’s tighter lending standards may prevent you from qualifying if you don’t make enough money.

Home equity. These days, this is the hardest thing to come by. The recent financial collapse burned up millions of dollars of home equity across the nation, leaving many homeowners underwater. If you don’t have equity to tap into or secure your new loan, you may not be able to refinance.

The last option is the easiest to work around. There are government programs in place to assist underwater homeowners who are current on their payments but unable to refinance.

The particular program that will remove equity requirements is HARP 2.0 program which helps many borrowers with low equity be able to qualify for refinancing.

The important thing to remember is that qualifying for a refinance is not unlike qualifying for any other mortgage type. Don’t avoid a refinance because you’re not sure if you’ll qualify.

Talk to a lender in your area who is familiar with properties like yours for sound advice.

Mortgage Refinance Rates

There are two ways to obtain the lowest refinance mortgage rates:

The lowest rates always go to the most qualified borrowers. If you want to save more money, you need to make sure your application is strong.
Second, different lenders offer different refinance rates. One of the best things you can do to save money on your refinance is to get multiple rate quotes from at least four or five different lenders in your area who are familiar with the loan you need. Compare the lowest refinance rates in the nation before you decide on a lender to work with.