Refinancing is the process of getting a new loan in order to pay for an existing one. Individuals most often take advantage of refinancing when dealing with mortgages.
There are many different benefits of trying to refinance a mortgage:
• Getting a new loan that has a lower interest rate
• Adjusting the length of a mortgage. This can be either to increase the term and reduce the amount paid monthly or to get a shorter term mortgage, which often provides lower interest rates
• Going from an adjustable-rate mortgage to a fixed-rate mortgage. Changing to a fixed rate mortgage means the interest rate will be steady on a month to month basis. This is also beneficial if an individual anticipates rates increasing in the future.
• Getting an adjustable rate mortgage with improved terms. This can mean a lower starting interest rate, lower payment caps, or lower interest rate adjustments.
• Cashing out from built up equity: When refinancing for an amount that is greater than the amount owed on the house, it is possible to get the difference as a cash payment through cash-out refinancing. However, this will mean you own less of your home
While there are benefits to refinancing, it may not be suitable to refinance a loan or mortgage under certain circumstance:
• If an individual has had the mortgage for a long time. The longer those payments have been credited to the principle, the lower the interest becomes. Deciding to refinance a mortgage would mean restarting the whole process where most of the monthly payment would go to paying interest as opposed to building equity.
• Planning to move from the home soon. The difference in monthly payments may not exceed the costs of refinancing so a break-even calculation can be used to figure out whether it is beneficial to refinance the mortgage
• The current mortgage has a prepayment penalty. By paying the mortgage off early the lender may have the right to impose a fee that would charge for this. Sometimes the prepayment penalty can be waived if the same lender is doing the refinancing.
What determines eligibility for a refinance?
The process to determined eligibility is similar as the process used for approval in the original mortgage. Lenders will often look at assets and incomes, other debts, value of the property, credit score, and the amount of the mortgage needed. If the newer credit score is lower than the previous, it usually results in a loan with a lower interest rate.
How much does it cost to refinance?
Typically, refinancing fees can be between three to six percent of the outstanding principal. This is in addition to any other possible fees, such as prepayment penalties or other costs.
The fees to refinance vary from lender to lender as well as state to state. Some of the fees include:
• Application fee: cost of processing the loan request and checking the credit report, can be between $75 and $300
• Loan origination fee: charged by lender to prepare and evaluate the loan, cost between 0% and 1.5% of principal
• Points: A system where one point is 1 of the amount of mortgage loan. There can either be a loan-discount point, which when paid one time reduces the interest rate of the loan, or points charged by the lender to earn money on the loan. This can be between 0% and 3% of principal
• Inspection fee: Professional can come and test or analyze the structural condition of the home. This can cost from $175 to $350.
• Appraisal fee: appraisal of home to ensure the property is worth the value of the home which can cost between $300 to $700.
If an individual is hoping to refinance a loan or a mortgage, it is necessary to weigh the pros and cons. The goal is to save money so it is important to see if that is feasible for a given situation.